This sell-off could be the start of a bigger decline, says long-time market strategist Sam Stovall

Published Thu, Jun 11 20201:40 PM EDTUpdated Thu, Jun 11 20207:06 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

CFRA's Sam Stovall said the market has been flashing signs that it was highly overbought and the sell-off Thursday could be part of a bigger pullback.
Stovall said stocks could decline 5% to 10% off the June 8 peak.
Reopening trade stocks were particularly slammed, but Stovall said they should turn higher again after the market shakeout.

CFRA's Sam Stovall said the market sell-off appears to have further to go to the downside, as it pulls back from a rapid 45% move higher. "It could end up shaving 5% to 10% off the June 8 peak," said Stovall, chief investment strategist and a market historian known for his analysis of past trends. The S & P hit a high of 3,233 that day. The S & P 500 closed down 5.9%, at 3,002 Thursday after a bruising sell-off. "We've been overbought for awhile and digesting gains would be natural," he said. Stovall said the fact that 97% of the S & P 500 companies' stocks were above their 50-day moving average was a warning. "Historically that's just too high...and also the P/E on the S & P was 25.1 of forward 12 months earnings, which is a 52% premium to the P/E average since 2000," he said. Stovall is also the chairman of the S & P Investment Policy Committee. The reopening trade stocks, like airlines, casinos and banks, which led the last leg of the market's gains were hard hit in Thursday's sell-off. Airlines, for instance, were down more than 10% Thursday, but were still more than 30% higher in the past month. "I would tend to say that the 3,000 level on the S & P is a pretty important line to hold," he said. "Once the pullback runs its course I think investors will move back again into the sectors and subsectors that were most beaten up in the bear market." He said a technical level of 3,028 was an important support level to watch. "We're basically due for a digestion of gains, questioning the reason for the rally," he said. "I think we have to go through some sort of shakeout and then maybe we start getting data that says it was a false alarm, not as bad as I thought." Stovall said the market was reacting to headlines about an increases in cases of the coronavirus and also the Fed's comments from Wednesday. Fed Chairman Jerome Powell did not surprise markets, but he did detail a slow recovery as the Fed released its economic forecasts. The Fed's collective guidance on interest rates showed the fed funds at zero through the end of 2022. The Fed also said it would continue buying $80 billion a month in Treasurys for the foreseeable future. "That's the market saying: 'That must mean they're seeing something we're not. It's time to sell because the economy is not going to go through a V shaped recovery," he said. Stovall said the market also received bad news from the National Bureau of Economic Research this week when it said the recession began in February. Stovall said in the past five recession declarations since 1980, stocks on average were higher by 2.8% 30 days after the NBER announcement. After 60 days, they were down 0.3% and down 1.7% after 90 days, on average.

A woman walks in the rain outside the New York Stock Exchange (NYSE) in the financial district of lower Manhattan during the outbreak of the coronavirus disease (COVID-19) in New York, April 13, 2020.

Andrew Kelly | Reuters

CFRA's Sam Stovall said the market sell-off appears to have further to go to the downside, as it pulls back from a rapid 45% move higher.

"It could end up shaving 5% to 10% off the June 8 peak," said Stovall, chief investment strategist and a market historian known for his analysis of past trends.