Trading Nation

A big year-end rally ahead, or shades of 1987? Traders debate the market’s next move

How much higher can the S&P 500 rise this summer?
How much higher can the S&P 500 rise this summer?

The stock market rally isn't about to fade anytime soon, according to Piper Jaffray chief market technician Craig Johnson.

"We're still bullish on this market, and we think there's more room to go," Johnson said Tuesday, as the slipped from the record levels reached the previous day.

In fact, Johnson recently raised his year-end price target from the already-achieved 2,424 to 2,575. Based on Tuesday's close, this implies the expectation that the S&P 500 will rise another 5.7 percent before the year is out.

"We've heard all the things that can go wrong with this market, but it's making all-time new highs," Johnson said on CNBC's "Trading Nation." "So clearly this is a bullish market, and the trend is still up, and any little dips that we may get over the summer months, we want to be buying."

Seasonality also appears to be on the market's side. He pointed out that from 2001 through 2017, July has been the best month of the year for the S&P 500. On average, the index has gained 3.26 percent in the month and has been positive 63 percent of the time, according to Johnson.

Not everyone sees the market Johnson's way.

"I know the cardinal rule of investing is never to fade the trend, but I can't help but think this market is going to run into a wall of economic reality," Boris Schlossberg of BK Asset Management said Tuesday on "Trading Nation."

"We just don't have the economic data to support this continuous upward trend in the market," Schlossberg said, making a point similar to the one economist David Rosenberg made Monday.

Pointing to the divergence between falling bond yields and rising stock prices, Rosenberg said: "We all have to make up our minds as to which of these two asset classes has the right story. ... I think the bond market is just basically responding to an economy that isn't really showing a whole lot of verve. ... If you're taking a look at who's the odd man out here, it seems to be the stock market action that we're seeing."

Rosenberg went so far as to declare that the divergence "reminds me of the period in the fall of 2007 when the stock market was putting in a classic double top, and everybody thought that we were going to have the longest cycle on record."

Schlossberg turns to a different year for bearish inspiration.

"This market reminds me very much of the summer of 1987, when it was just a Teflon market, nothing could bring it down, and then 'swoosh,' it dropped in one fell swoop. I don't think we're going to have a crash, but I do think it's flashing a lot of warning signs," Schlossberg said.

Among these bearish signals is the "big divergence between momentum — the pace of its rise — and its rise. And I think that's a first sign, perhaps, that we're due for a correction," the strategist added.

So far this year, the S&P's moves have been muted, to say the least. Tuesday's 0.67 percent drop was actually the fourth-worst decline for the S&P 500 this year. And the broad-market index has only risen by more than 1 percent in two sessions.