Futures Now

Obscure indicator points to 'deep drawdown' for stocks: BofA technician

Why October will be bad for stocks: BofA
Why October will be bad for stocks: BofA

Investors should brace themselves for a scary October for stocks, according to top technician Stephen Suttmeier.

On CNBC's "Futures Now" Tuesday, the Bank of America analyst explained why complacency and weak seasonals could send equities as much as 5 percent lower over the next several weeks.

"The worst three-month period of the year happens to be August through October," said Suttmeier. He noted that this weakness occurs in both a traditional market as well as during presidential election cycles. "What we are seeing right now is nothing unusual."

However, it's what he is seeing in one obscure indicator that has him anticipating a "deeper drawdown" in stocks.

"The risk is that a deeply overbought or tactically complacent VXV/VIX ratio, along with a lack of fear in the put/call ratios, limits upside and suggests some unfinished business to the downside in stocks," said Suttmeier.

He explained that the VXV/VIX ratio measures expectations of volatility three months out versus the expectations of volatility in the near term. Readings above 1.2 are overbought and readings below 1.0 are oversold.

"Tactical fear or oversold VXV/VIX readings below 1.0 have done a good job of calling market lows. The VXV/VIX closed at 1.306 on Friday," he added.

Rather than hit the panic button when the S&P 500 starts to slip back toward the 2,050-2,100 level, Suttmeier said investors should use the opportunity to buy the dip — as in the bigger picture he expects the large-cap index to eventually rise to 2,300.

"The good news is that we are getting closer to the time of the year when the seasonal mantra shifts from 'sell in May and go away' to 'buy in October and stay,'" he said. Suttmeier noted that the S&P 500 tends to rise an average of 5 percent during the period of November to April.

The S&P is tracking for its fourth consecutive positive quarter — with its best performance since the third quarter of 2015.