Stocks could be in for some near-term pain.
Surging trading volumes have caused wild swings in the stock market in a week packed with earnings, and there could be more downside in store, strategist Katie Stockton told CNBC's "Trading Nation" on Thursday.
The last week of trading has created some "concerning" divergences in the market, said Stockton, founder and managing partner of Fairlead Strategies.
"Equal-weight benchmarks have started to really peter off in terms of momentum and now, of course, the major indices reflecting mostly large caps, like the S&P 500, have come off from their highs on a loss of short-term momentum as well," she said. "We're starting to see, really, a chink in the armor of the market."
"That overbought condition is something that was widespread ahead of last week, and the overbought downturns that now are associated with a loss of short-term momentum do support a pullback here in the near term," she said.
"The initial support level that we're watching for the S&P 500 is right around 3,588 and that's where we'll revisit the status of the short-term indicators and see if we feel like we have a buying opportunity at hand," Stockton said.
The S&P traded less than 1% lower at around 3,765 early on Friday.
Market trends suggest some are already getting defensive, Chantico Global founder and CEO Gina Sanchez said in the same "Trading Nation" interview.
"In the last month, for the first time in years, actually, we've actually seen that shift to the lowest-volatility names garnering the highest returns," Sanchez said. "That basically suggests that the market is becoming significantly more defensive. And this is significant because we just haven't seen this kind of a rotation back to that kind of market-conservative stance in a very long time."
Sanchez noted that from an earnings-neutral perspective, every S&P sector's valuation has expanded during the coronavirus pandemic except for energy's — and another group could still have "a ways to go."
"Consumer discretionary, actually, even though it looks very expensive, if you neutralize the earnings part and you assume that earnings will be able to get back to normal in the next 12-18 months, that part of the market actually probably could do very well," said Sanchez, also chief market strategist at Lido Advisors.
"If you look at forward earnings estimates, consumer discretionary [stocks] are expected to grow significantly higher than S&P, sort of hitting their hump right around Q2 of 2021," she said. "So, I think that that segment of the market is going to be one to watch in the recovery."
Consumer discretionary stocks may not be spared from a near-term decline, however, Fairlead's Stockton said.
"It does appear more vulnerable as we come into earnings," she said, noting the sector's overbought condition. "I'll be really interested to see how they react. Indeed, I think they're prone to a pullback here as well with the broader market and with the existing leadership, and that we'll actually see REITs, utilities, consumer staples have their time to shine in terms of relative performance."