Trading Nation

Stock market similarities to 2018 could signal a wave of volatility and a correction

VIDEO4:1604:16
This stock market looks a lot like January 2018, top strategist warns

A virus sweeping through China, an impeachment trial in the Senate, and mixed earnings results – nothing appears to shake this unstoppable bull run.

Until now. The sense of calm could be over, predicts David Spika, president at GuideStone Capital Management, which has nearly $14 billion in assets under management. Spika sees a similar setup to January 2018, a period that marked a peak before a bout of volatility took stocks sharply lower.

"You just have to look at investor sentiment. We're seeing very bullish measures in the put/call ratios and the bull/bear ratios, and you're seeing significant exposure of low volatility-targeting funds in the markets," Spika told CNBC's "Trading Nation" on Tuesday.

The S&P 500 peaked above a then-record 2,870 at the end of January 2018. Within two weeks, the broad-based index had fallen nearly 12% and the volatility index had spiked to a more-than-two-year high of 50.

He also notes how long this market has gone without even a small pullback — according to his research, the S&P 500 has not fallen by more than 1% in 70 trading days. The last time it saw such a long stretch was through to October 2018. Volatility holds at a comparatively low 12.8 level as of Tuesday.

With such strong sentiment and relative market calm, Spika warns that any bad news could trigger a wave of volatility that takes markets down.

"When optimism is this high, it doesn't take much to trigger a sell-off … [If] the forward guidance is somewhat negative; if we see a spike in interest rates; if anything comes out that potentially could hinder the next phase of the China trade deal, any of that could be the trigger that starts the downturn," he said. "We don't expect a recession or a bear market — but a healthy 10% correction is something that is probably needed at this point."

Though Spika says markets have become overvalued, there are a few places he sees as hideout spots in case stocks take a tumble.

"At this point we would want to own the sectors that have very visible earnings growth, and that tend to be not particularly economically sensitive," said Spika. "We like sectors like health care and real estate that don't need significant economic growth in order to push them higher, and that's where we think the opportunity should lie near term."

The XLRE real estate ETF and XLV health care ETF have risen 3% this month.

Disclaimer