Is a market correction on the horizon for U.S. stocks? According to Craig Johnson, chief market technician at Piper Sandler, a correction appears imminent as stocks are running out of positive catalysts to drive further gains.
The relentless ascent of the stock market has many investors nervously pondering one critical question: How much higher can it go? Craig Johnson of Piper Sandler suggests that a market correction could be imminent, with stocks seemingly exhausting the fuel needed for their upward journey.
Johnson points to a confluence of technical indicators as the harbinger of a forthcoming downturn. A notable decline in the number of industry groups climbing above their 40-week average, coupled with a peak in the number of new highs at the close of 2023, paints a concerning picture. Johnson metaphorically notes that the market’s climb is akin to “going up on bad breath,” indicating underlying weakness in the rally.
A cornerstone of Johnson’s argument is the concept that markets move on reasons—and the current landscape is becoming barren of such motivators. With the earnings season wrapping up and the Federal Reserve’s potential rate cuts not expected until at least May, the market may lack the impetus to continue its climb. This expected inertia could open the door to a correction, possibly bringing the S&P 500 to around 4,600 points, according to Johnson’s projections.
However, Piper Sandler remains optimistic about the market in the longer term, despite anticipating this correction. Johnson foresees a shift in investor focus from tech giants like Amazon and Meta Platforms to sectors that lagged in 2023, like financials and healthcare. These are areas that could benefit from a reallocation of capital as the market adjusts.
Looking ahead, the timing of the Federal Reserve’s interest rate actions could play a pivotal role. Johnson predicts that June might see the first rate cut, potentially igniting a rally in small- and mid-cap stocks, which often benefit from lower borrowing costs.
Despite the near-term headwinds, Johnson maintains a year-end target for the S&P 500 of 5,050. This outlook suggests that while the market may endure some volatility and corrections, particularly with the November election acting as a backdrop, the overall trend could remain positive.
In conclusion, while the current market exuberance has pushed the S&P 500 to new heights, the combination of waning momentum indicators and a dearth of near-term catalysts supports Johnson’s cautionary stance. Investors may be wise to adopt a more measured approach, recalibrating their strategies in anticipation of a market that could soon seek a lower equilibrium. As always, the dance between optimism and prudence continues to shape the investment landscape.
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