Has The Much Anticipated Pullback Or Correction Begun? 😅

The S&P 500 index has surged 20% since near the end of October—barely three months ago—and a correction may already be under way. Stocks need a reason to move higher, and the market is running out of those reasons. Thus, Craig Johnson, chief market technician at Piper Sandler, believes a market correction is imminent.

⚠️ Looking at SPY puts under the psychological 500 breakdown or calls above 501.65 after CPI data report at 8:30am on Tuesday. Plan the trade and trade the plan, don’t get too emotional with the law of physics. Not financial advice! ☺️

More room to slide than to spike

“Some of the internal indicators that we produce have just given us a sell signal,” Johnson said on Monday, while appearing on Benzinga’s PreMarket Prep.

“When we’ve seen this signal in the past, it’s been a pretty good indication looking forward over the next three or four months — it could be just a pullback or a correction. But it’ll definitely be more than just noise,” he said.

Johnson noted three technical indicators, including a decline in the number of industry groups that were above their 40-week average, while the number of new highs among these groups peaked at the end of 2023.

“All of this happened as the market was working its way higher, so this market is really going up on bad breath,” he said.

“So, we’re saying: ‘You don’t have to let go, but hold on loosely.’ Be ready for a correction in this market that could probably take the S&P 500 back to about 4,600,” Johnson said, adding that the low is likely to come towards the end of March or early April, at which point the market will provide a better entry point.

5-10% drop is healthy for the market

Johnson said that earnings season and expectations of Federal Reserve interest rate cuts have been the catalysts for sending the market higher. While the catalyst for a correction, if inaction can be called such, will be the lack of positive drivers.

“We’ll be out of earnings season, and the Fed isn’t going to tell us anything new, probably until the May meeting,” he said.

This doesn’t mean, however, that Piper Sandler is turning negative on the market, Johnson said.

“We like the market longer term,” he said, but added he expected some rotation out of the tech mega caps, such as Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META) towards financials and healthcare stocks.

These are sectors that underperformed the main index in 2023. In 2023, the SPDR S&P 500 ETF (NYSE:SPY), an exchange trade fund that tracks the main index, gained 24%.

By contrast, the iShares U.S. Financial Services ETF (NYSE:IYG) gained 13%, while the Health Care Select Sector SPDR ETF (NYSE:XLV) gained just 0.4%.

Merry go round is normal too

Johnson’s year-end target for the S&P 500 is 5,050 — that’s the base case, he says, as investors grapple with intermittent corrections and the distraction of the November election.

“Unless the market just wants to keep going higher — but that’s a really tough argument technically,” he said.

Johnson concluded: “I just don’t think today is when you put the pedal to the metal — this is where you pull it back a little and wait for this market to come back to you.”

A market correction is usually defined as when a stock index falls more than 10% from its most recent cyclical peak — that would be the fresh record high that the S&P 500 struck on Monday. A correction turns into a bear market when the index falls by more than 20%.

Buy call

Buy call

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