An investment bank founded in 1895 warns that it is within the realm of possibility for the S&P 500 to drop to a level not seen since June of this year.
In a new CNBC interview, Piper Sandler chief market technician Craig Johnson says the S&P 500 is flashing a bearish signal, leading him to believe that the sell-off is not yet over.
He also notes that the weekly relative strength index (RSI), a momentum indicator, is waning, which could indicate a repeat of a correction witnessed earlier this year.
“When we look at one of our indicators that we’ve looked at for a long time here at Piper, measuring the number of stocks above a very simple 40-week moving average, that has been slowly deteriorating. In fact, it has been deteriorating since the end of August, and it is now getting to levels where perhaps in the next week, it could actually go into a sell signal for the first time since we came off of the lows in the April timeframe.
On a shorter-term basis, if we go back and we look at a very simple momentum indicator, the RSI on a 14-period basis, when it starts breaking through the midpoint at 50, we did that back in the February time frame, and the market sort of picked up steam to the downside…
I suspect that is something that we could see kick in next week. So this is, from our perspective, sort of a flashing yellow light.”
As for his downside price target, he says the S&P 500 plunging to the 6,150 level is a “distinct possibility.”
But while Johnson expects market pain in the short term, he believes that those who accumulate amid the dip will be rewarded in the coming months.
“Having just been traveling and seeing clients, there are a lot of large institutions that did not participate that well off the lows… And hence, they’re hoping for some sort of shorter-term pullback. And the buy-the-dip crowd will be there. And again, this bull market is not over. We will enter the fourth year of the bull market. It is usually fourth years are usually pretty good, up around 12% and change for the full year. And we are optimistic for next year. But short term, I’ll look to raise my price target on a pullback, not while it’s sitting here at the highs.”
Piper Sandler is a Minneapolis-based bank and institutional securities firm specializing in investment banking, institutional brokerage, and asset management services.
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