Waiting for the stock market to bottom so you can jump back in? Some strategists think the S&P 500 index might have to fall another two percent before it's time to buy.
Sam Stovall, chief investment strategist at S&P Equity Research, wrote in a recent note to clients that investors shouldn’t expect a rally until the S&P slips to 1250. The level corresponds to the index’s 200-day moving average.
“Our belief is we’re going to have to go down to the 1,250-level before there’s enough support to provide a springboard effect,” said Stovall.
The S&P has tumbled for six straight weeks and is nearly off 7 percent since April 29—when it hit a three-year high. The index, a broad proxy for the overall stock market, is up only 1.3 percent for the year.
Stovall notes that stocks have been able to avoid an even deeper selloff, thanks to weakness in the U.S. dollarsince late May.
Other strategists offered similar outlooks.
“We are in for a correction,” said Kenny Polcari, managing director at ICAP Equities, referring to a 10 percent or more decline in stocks.
And should the S&P slide to the 1,250-mark, Polcari expects the index to temporarily “churn” at the level until the next big catalyst—second quarter earnings—kicks in. Earnings seasonunofficially starts when Dow component Alcoa reports on July 11.
Meanwhile, some strategists said the recent decline in stocks is the market’s way of finding “equilibrium.”
“Markets being down for six weeks is an anomaly, but I don’t think it takes away from the fact that GDP’s growing—it’s still positive,” said Rob Stein, portfolio manager and senior economist of Astor Asset Management. “We’re reverting to the mean and markets are trying to find an equilibrium…we are still up year-over-year.”
Stein said while there may be further declines ahead, he does not see the selloff as the beginning of a bear market or another recession.
He said investors would profit by looking into sectors such as financials, energy and healthcare.