The market may have posted an unprecedented recovery since the March 23 bottom, but one market strategist says investors need to prepare for a “downside correction.”
RW Advisory strategist Ron William said this week that the market is stuck in “asymmetric risk” on technical, seasonable, and political fronts, and said if the S&P 500 breaks below 3,000 would be a “downside trigger” for a move lower.
“The Nasdaq is obviously the most overbought and certainly not representative of the USA and not the world,” William said. “I would suggest that everyone get ready for an August peak and a September or October correction, if not a protracted rolling W crash into year-end.”
William isn’t alone in warning of an impending correction.
Ed Yardeni, president of Yardeni Research, says that the surge in coronavirus cases in the U.S. and growing tensions with China could spark a 20% to 30% meltdown.
“We’ve had a melt-up and that’s very visible in valuation multiples. Stocks are not cheap,” Yardeni said. “On top of that, we don’t seem to be handling the opening up of our economy and social distancing to minimize the flare-ups of the virus as well as they’re doing in some parts of Asia and Europe.”
“We’re seeing major states reversing the reopenings of their economies. So, all this good news we’ve gotten in May and June on the economic front, including even the unemployment numbers, is vulnerable,” Yardeni added. “On top of all that we’ve got an increasingly and potentially dangerous conflict between the United States and China escalating again.”
Despite rising risks, the market has continued to rally higher over the last few months. But William noted that the “smart money’s” exposure to equities is at its lowest level in nine years, with much of the rally fueled by retail investors, which William says is a “telltale sign for downside risk.”
“Smart money is out. Hot money, speculative money is in,” William said. “That is a big paradigm that we need to be asking ourselves questions on.”
“Of course, the Fed has been pumping the market up by record amounts and other central banks have been following suit,” William continued. “Central bank policy can influence liquidity but not insolvency and so this is the 1929 paradigm, because similar things did happen back then.”
William concluded that if “hot air” is driving the market higher, the downside risk is undoubtedly around the corner.