Bank of America (BofA) warns that the S&P 500’s record-setting advance could give way to a sharp pullback before the year is over.
In a new CNBC interview, BofA’s head of technical research, Paul Ciana, says he compares the ongoing bull run from 2022 to 2025 to the one witnessed from 2015 to 2018.
According to Ciana, the stock market dropped by 10% at the start of 2018 before rallying to new highs and suffering a 20% drawdown by the end of the year. The market strategist notes that the technical analysis rule of alternation could kick in this cycle, suggesting that the S&P 500 could plummet in the coming months.
“This particular year, we had that big drawdown in the early part of the year, a rally to higher highs, greater than 2018 in percentage terms. And so the risk is the rule of alternation in technical analysis, where the size and sharpness of corrections tend to alternate, which would mean the risk is a 10% correction, let’s say, into year-end or early Q1.”
He also notes that the rally’s technicals are weakening despite headline gains, a sign that fewer stocks are supporting the index’s advance.
“So the breadth looks terrible. It’s an AI boom, and that’s what’s carrying the S&P 500 to higher highs. If you were to look at the New York Stock Exchange advanced decline line, you would see that that cumulative line has not made a new high for many months, which means there are fewer and fewer stocks carrying the industry to higher highs.”
Ciana points to additional indicators suggesting the same trend.
“Same thing goes with the percentage of stocks trading above the 50-day moving average for the S&P 500 members. That’s been declining. So when we see breadth that’s weak like that, we know that the support for the index overall is being driven by less stocks, and that’s discouraging.”
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