Stocks may be headed for a short-term slump.
The S&P 500 posted its first week of losses in more than a month on Friday despite ending the day slightly higher, putting a damper on the seemingly bulletproof rally that brought the major averages to record high after record high in recent weeks.
One underlying trend in the S&P's chart shows that stocks could be headed for another bout of pain, JC O'Hara, chief market technician at MKM Partners, told CNBC's "Trading Nation" on Friday.
Calling the broader stock market "a little overbought in the short term," O'Hara said it's important to gauge whether the condition is "a good overbought or a bad overbought."
To do so, the technical analyst looked at how much time the S&P spent above its short-term, 10-day moving average, as detailed in the below chart.
"We found the streak to be 30 days. That streak ended yesterday, but that is one of the longest streaks on record," O'Hara said.
O'Hara then looked at what happened the last five times the S&P had that long of a streak in the last 10 years.
"What we found was the market had a very minor pullback, consolidated for a few weeks before ultimately, in most cases, resuming its uptrend," O'Hara said. "So, I don't want to get too negative here. Yes, we're up a bunch, but I think if we repeat history here, we're due for a short-term consolidation before resumption of the uptrend."
Steve Chiavarone, equity strategist, vice president and portfolio manager at Federated, said in the same interview that his research put his outlook in "a very similar place," albeit via "a different methodology."
"A year ago, we had a target on the market for 3,100. We've achieved that, and it was based on the idea that if we weren't going to have a recession this year, then the bull market would continue and we would hit new highs," Chiavarone said. "As we sit here today, we very much feel the same way."
Without the conditions necessary to spark a recession — which were not yet in place — "the economy is closer to reacceleration rather than rollover," he said.
"In that environment, we still feel pretty good. So, we think the market ultimately ends next year somewhere closer to 3,500. We could have a short-term pullback, sure, but that would be a buying opportunity, in our eyes," Chiavarone said.
A climb from the S&P's Friday closing level of 3,110.29 to 3,500 would be a more than 12.5% move. Asked whether a reacceleration in corporate earnings or a wholesale revision of the broader market's multiple could create the conditions for such a move, Chiavarone said it would likely be "a little bit of both."
"Our view is that some of the earnings … lull that we've seen here will reverse itself and we'll start to pick up, particularly because we think there are signs that manufacturing activity is starting to bottom," the strategist said. "In addition, the long-term discount rate for stocks has fallen. It's clear, or at least the market expectation is, that we're not going to get back to a 3% level on the 10-year. If that's the case, we think you could see a little bit more multiple expansion."
