- Tyler Ritchie said the S&P 500 index rose to 6,000 in February.
- Now, the co-editors of the Sevens Report are warning of a possible market pullback.
- However, fundamentals remain generally strong and could continue to push the stock higher.
Back in February, Tyler Ritchie explained why: S&P500 It could go up to 6,000. Investor sentiment was bullish, but not overly bullish. The Dow Jones Transportation Index rose in line with the S&P 500 for the year, indicating the economy is in good shape. Additionally, the S&P 500's relative strength index has been above 70 for three weeks, which historically has meant the rally could be even more prolonged.
This was a bold decision for the technology strategists of the time. He is also co-editor of Sevens Report, a research firm whose clients include JP Morgan, Charles Schwab, and UBS. The index was around 5,000, and this prediction meant it would rise another 20% on the back of an already monster 40% rally from its October 2022 lows. The stock also significantly exceeded the price targets of Wall Street's top strategists.
Now, that rally is paying off, with the S&P 500 index crossing the 6,000 mark in November. This is largely due to optimism about artificial intelligence, the health of the U.S. economy, and the potential for deregulation under the Trump administration.
Ritchie told BI this week that he is now seeing signs that the party may be over sooner than people think.
The strategist said he wasn't necessarily bearish in the near term and that if left unchecked, the rally could continue, but he warned that the market could be one step away from crashing and that would be bad news.
“Looking to the future, the set of market indicators and cyclical signals we are monitoring indicate that all the ingredients are in place for this bull market to end in the coming weeks or months and for a cyclical bear market to begin. Ritchie said in an email, adding: “The current fundamental backdrop suggests that a bear market in stocks is certain or likely. There is nothing.”
technical indicators
Ritchie uncovered a number of technical indicators that support his theory, including the S&P 500 Relative Strength Index (shown at the bottom of the graph below).
RSI measures price momentum and a value of 50 is neutral. Measurements below 30 and above 70 indicate weak or strong momentum, respectively. Despite being at an all-time high, the index is currently below 70, a divergence that suggests momentum may be slowing.
Sevens Report Survey
“The failure of the weekly RSI to 'confirm' a new high for the S&P 500 means that it has failed to 'confirm' a new high for the S&P 500,” he said in an email. “This is something that we have seen leading to a decline.” I'm referring to the stock market crashes of 2000 and 2008.
Second, investor sentiment, often considered a contrarian indicator, is at an all-time high. The Conference Board said more than 56% of consumers believe the stock market will rise in 12 months, which could indicate that stock market gains are becoming frothy and diverging from fundamentals. Ta.
The world's M2 money supply (basically the amount of money in savings accounts) is also shrinking, which usually bodes poorly for risk assets such as stocks, he said. This indicates that liquidity in the economy is drying up and that stocks are absorbing less capital.
Meanwhile, as the Fed lowers interest rates and yields on two-year Treasuries (red line) fall, the inversion yields on three-month Treasury bills and 10-year Treasuries (blue line) are starting to narrow. Since the 1960s, the three-month and 10-year yields have reversed every time there has been a recession, as investors were concerned about the health of the economy and sought safety in long-term interest rates, while the Fed This is because short-term interest rates were raised. Risk-free assets like 10-year notes. That demand causes prices to rise and yields to fall. Like the three-month note, the yield on the two-year note is closely tied to the federal funds rate.
Sevens Report Research/St. Louis Fed
Ritchie's downside price target is around $4,800, which would imply a 21% decline in the S&P 500 and a return to valuation norms. In case of a recession, the market could fall across the board towards 3,500, he said.
Start with the basics
As Ritchie says, technical indicators allow for pattern recognition over time, but they are just one factor to consider when analyzing the market. Fundamentals are a more important factor in determining stock performance.
Most strategists and economists now argue that economic fundamentals are sound. Unemployment insurance claims remain low. Consumers continue to spend. And the Fed appears poised to continue lowering rates, which should further stimulate economic activity.
However, the market is historically expensive, with Shiller CAPE ratios comparable to 2000 and 1929 levels. Top Wall Street veterans like Goldman Sachs' David Kostin and Research Affiliates' Rob Arnott have been making this point in recent months.
Therefore, any negative development that casts doubt on the market's buoyant outlook could spook investors and trigger a selloff.
guru focus
Ritchie said, for example, that employment data suggests hiring is cooling, and weak numbers in the coming months could derail the soft-landing narrative. There's also some risk to the economy continuing to eat hot steaks, with inflation potentially running well above the Fed's 2% target. That could result in fewer rate cuts than expected, prompting investors to reassess their outlook.
So far this year, the market has taken most of the negative news with a grain of salt, and bearish forecasters have been proven wrong time and time again. And that may continue. Even the stubbornly bearish David Rosenberg, famous for causing the recession in 2008, seemed to capitulate, acknowledging in a note to clients on Thursday that the market might be right about AI.
“This bullish phase has lasted long enough that those who have been on the wrong side of the trade so far need to take a different direction. This is not about throwing in the towel, it's about understanding what's going on. “There's definitely more to what we've seen over the past two years than just calling this a 'bubble,'” Rosenberg said. He wrote, “Generative AI is a game changer for the future. If so, multiples based on long time frames may not be a bubble at all.”