As I said a couple of weeks ago, I turned bullish for the month of Apr due to the technical strength and seasonal bullishness of the month. I'm glad I did so as the market has made several new highs in the past two weeks. We are still in the middle of April and the earnings season has just begun. So likely we will continue to see a few more weeks of good time for the market. Having said that, it is undeniable that the current bullish sentiment is nose-bleeding and traders have likely priced in a lot of fantastic good earnings expectations.
Technically S&P by all means is very stretched, significantly deviated from its 50 DMA and 200 DMA. In one word, traders are "all in" at the moment. This is likely setting up for a big correction, especially when we move into the bearish season starting from May. Apparently I'm not thinking that alone.
Recently, Bank of America's Savita Subramanian discussed why the market could drop to 3800. Her big question is whether all the "good news" already "priced in?"
"Amid increasingly euphoric sentiment, lofty valuations, and peak stimulus, we continue to believe the market has overly priced in the good news. We remain bullish the economy but not the S&P 500. Our technical model, 12-month Price Momentum, has recently turned bearish amid extreme returns over the past year."
I'm personally convinced that a big correction is brewing but how big can it be? BofA only expects a 10% correction but I think there is a risk of a deeper reversion.As shown below, over the last 5-years, corrections have ranged from roughly -10% to -33%. Notably, these corrections usually have reverted the index either to the 200-dma or beyond. Given the magnitude of the market's current deviation from the 200-dma, a correction will likely surpass 3800. A retest of the 200-dma seems most probable. Or in other words, we may see a 15-20% correction in the next few months.
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