October was a frightening month for stocks, and more pain could be just around the corner.
That’s according to Bank of America Merrill Lynch’s Global Research chief equity technical strategist, Stephen Suttmeier, who says there’s a technical signal bubbling just under the market’s surface that could be a bad omen for stocks.
What he’s seeing is a market peak coinciding with contracting margin debt which suggests a growing risk-off sentiment, a pattern that also happened before the last two major crashes. Margin debt measures how much traders borrow from their brokers in order to finance a trade, and margin debt slowing down as stocks hit higher highs indicates a thin rally with investors not willing to take on more risk.
“In 2000 margin debt topped out. Basically oxygen coming out of the market, people less willing to take risk and that had an impact. You had a higher high in the S&P and then it was lights out until about 2002. The same thing happened in 2007,” Suttmeier told CNBC on Tuesday.
“The risk is if margin debt continues to fall here we could be in a sell-strength market,” he said.
Suttermeier also noted that the damage done to the S&P 500 this month is a troubling sign.
“An important level has been broken: the 40-week moving average and the uptrend that goes all the way back to early 2016. This is not a good sign. … You can get rallies here and there but when you think about what has happened here, investors are pretty darn bearish,” Suttermeier said.
And he’s not the only technician sounding the alarm.
Chart-based trading pioneer Ralph Acampora says that the stock market is in worse shape than many are realizing, and that the technical damage done this month—which has seen all of the gains for 2018 erased for both the Dow Jones Industrial Average and the S&P 500, and has pushed the Nasdaq into correction territory—won’t be fixed for months.
“From a technical perspective, the damage that has been done technically to the stock market is much, much worse than people are talking about,” Acampora told MarketWatch on Tuesday.
Acampora, who many chartists call the “godfather” of technical analysis, noted that the collective decline of the FANG stocks—Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Google-parent Alphabet (NASDAQ: GOOG, GOOGL)—is the clearest signal that the bull market has taken a turn for the worse. The FANG stocks have lost a combined $120 billion in market value.
“I’ve been a bull for a long, long time and like everyone, I was waiting for a correction but this is something different,” Acampora said. “All the leadership is getting crushed.”
For Acampora, this market echoes the dynamic of the market crash of 1987, when the Dow lost an historic 22.6% in a single trading day. He thinks we’ll soon see the market go into bear market territory.
“Honestly, I don’t see the low being put in yet and I think we’re going to go into a bear market,” Acampora said while also anticipating that the stock market may not improve until somewhere around the first quarter of next year.
Acampora and Suttermeier have joined an ever-growing list of prominent names in the investing world speaking out about the state of the market.
In September, Morgan Stanley’s Mike Wilson said that we’re already in a ‘rolling bear market,’ and weeks before that, Guggenheim Partners’ Scott Minerd warned that the market was in its “last hurrah,” and urged investors to sell.
Bridgewater Associates’ Ray Dalio also recently said that the market was in the “seventh inning of the cycle,” and that the next recession will be “more severe in terms of the social, political problems. And I think it will be more difficult to handle… It won’t be the same in terms of the big-bank crisis. It’ll be a slower growing, more constricting sort of crisis that I think will have bigger social implications and bigger international implications.”