Bank of America warns investors of impending market slump

Paul Ciana, Bank of America’s global chief technical strategist, warned on Monday that the stock market is showing a handful of signs that the latest rally may be about to reverse course. He said those factors could challenge the recent rally that’s pushed the market to all-time highs.

BofA noted that the S&P 500 hit the bank’s 6,500 target this summer and pushed to another new high. The bank also revealed that its 6,625 secondary target is close to getting hit, with the index exchanging hands at 6,606.

Summer-to-fall transition pushes stocks lower

Ciana maintained that the summer-to-fall transition tends to be rough for stocks. According to BofA data, the S&P 500 typically sees its worst performance in September. He also believes the stock market could now be headed for the worst week-and-a-half-long stretch of the year.

BofA data shows that stocks tend to have the largest downside risk in the last 10 days of September. The bank’s stock data analysis dating back to 1928 shows that the S&P 500 was only up 40% of the time, with an average return of -1.1%.

Ciana said that the prospect of a downturn is worse when coupled with a year that kicks off a president’s term in office, like 2025. BofA data shows that the index is only up 29% of the time and posts an average return of -1.5% during the last 10 days of the month in the first year of a new presidential cycle.

The bank’s analyst revealed that the last 10 trading days of the month usually begin on September 17, which coincides with the Fed’s next rate decision. According to Ciana, investors expect Wednesday to be a volatile day for trading since the market priced in a 96.1% chance the Fed will cut interest rates by 25 bps at the September meeting.

Interest rate cuts could cause stocks to rise

Andrew Tyler, the global head of market intelligence at JPMorgan, cited research from the bank’s chief U.S. economist and stated that there might be a dovish cut, which could produce a positive gain. He revealed that S&P 500 options are currently pricing in an 88 basis point move on the rate decision day.

Tyler maintained that the bank pegged a 47.5% probability that the central bank will issue a 25 bps cut and issue dovish commentary about the state of the economy. He believes such a scenario could see the S&P 500 gain around 1% immediately after the rate cut, suggesting that the benchmark index could rise to around 6,650.

“As we look toward the month-end, Fed Day may act as a ‘sell-the-news’ event as investors take time to consider the macro environment, the Fed’s future reaction function, potentially stretched positioning, a temporarily weaker corporate buyback bid, waning retail investor participation, and quarter-end rebalancing.”

-Andrew Tyler, Global Head of Market Intelligence at JPMorgan.

Tyler argued that stocks could fall as much as 5% if those headwinds take hold in the coming weeks. He also believes that a sell-off could make room for several buying opportunities for investors.

The Bank of America technical analyst also noted that the Dow Jones Industrial Average recently rose to a fresh all-time high. However, the Dow Jones Transportation Average, a separate index linked to the benchmark index, has lagged. Ciana said the Transportation average has not broken above anything relevant to confirm the breakout.

The BofA analyst revealed that the Dow Jones Transportation Average also recently plummeted below its trend line support, and its 200-day simple moving average is also dropping. He believes it shows signs that the index is losing momentum.

Ciana noted that market breadth, which measures the proportion of rising stocks versus those dropping, is starting to pull back. He also found that the NYSE advance-decline line, which measures the number of stocks listed on the New York Stock Exchange that are rising versus falling, has stalled recently.

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