Technician Sends Warning for Stock Market Bulls

Trader on the floor of the NYSE
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Trader on the floor of the NYSE

As the S&P 500 flirts with its all-time highs, there is a great divide between technicians calling for a correction and bulls who think the rally has legs.

In his research note Monday morning, Oppenheimer Asset Management's chief market technician Carter Worth argues that the market is ahead of itself and that investors are right to anticipate and position for a normal, garden-variety 6 to 9 percent correction.

Worth notes that the move off the Nov. 16 low of 1,343.05 to the high a week ago of 1,563.32 is a mature intermediate advance. He said it is mature in terms of magnitude (up 16.4 percent) and duration (18 weeks in the making), which leaves the S&P 500 in a steep uncorrected position.

The technician tells his clients that a pullback is in the cards, just like the last two times the market advanced four to five months without pause.

"Further, we believe those who continue to blindly/stubbornly stay long without trimming in any way, are embracing asymmetrical risk/reward, chasing limited upside while risking disproportionate downside," Worth said.

While the charts might point to a correction ahead, James Stack of InvesTech Research said historical evidence points toward further gains.

The S&P 500 has now moved upward in 10 of the past 11 weeks. Over the past 85 years, there have been 23 instances when the S&P 500 has had a similar winning streak. While it is unusual for the market to be up in 10 of 11 weeks, Stack said, it is not necessarily a sign of imminent trouble.

When that has happened, the S&P 500 moved sideways roughly half the time in the following month. But by the end of three months, there was a median gain of 4.9 percent. Gains really picked up six months and even a year later, when the index rose on average 7 percent and 12.6 percent, respectively.

There were only two instances when the market was down more than 5 percent (1957 and 1989), but both occurred when there was significant tightening of Federal Reserve policy during the preceding 18 to 24 months, Stack said.