While they may be at all-time record highs there are “definitely some warning signs that the uptrend (in US stocks) is both stretched and losing momentum”.
That’s the view expressed by the Citi FX technical analysis team in a research note released overnight in which they warn the S&P 500 index could be primed for a “susceptible to a material correction”.
The basis for their caution is demonstrated in the chart below.
What it shows is the relationship that exists between the closing level for the S&P 500 compared to it’s one-year monthly moving average which is the line shown in red. What they have discovered, also circled in red, is that whenever the index has closed below this moving average at months end it has corresponded with a significant correction in the index.
How significant, you may ask? An average of 34% over the past two decades.
To give you some perspective, based off Thursday’s closing level – 2112.93 – an “average” 34% decline would see the S&P slump to 1400 points.
While unlikely that the index will close below its 12-month moving average in April – that would require a decline of 5% in the remaining five trading sessions – given that US stocks tend to underperform between May to October it suggests a risk, at least based on historic norms, that a monthly close below this level could occur midway through the year.
This, of course, corresponds around the same time the US Federal Reserve is expected to begin increasing interest rates.
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