Here’s why the market could see greater downside than your “garden variety pullback” in the near term.
After last week’s fall, stocks have bounced back a bit this week.
After falling 2.5% last week, the S&P 500 is up 1.3% since last Friday as of Wednesday’s close. The Dow has also added 1.3%, and the Nasdaq has gained 1.8%.
But despite this week’s comeback, one expert says signs point to more pain on the horizon.
BTIG chief equity and derivatives strategist Julian Emanuel said this week there’s evidence in trading activity that indicates retail investors are still over-exposed to the market’s most expensive stocks.
“Rather than fear being priced in the options market, there’s fear of missing out,” Emanuel said. “The price of out of the money calls, as was the case throughout August, is still trading at a premium to the price of out of the monty puts. That is a very abnormal position.”
“That tells us that the public is still very committed – as are the large institutional investors,” Emanuel continued.
Given this scenario, Emanuel says stocks are vulnerable to greater downside than your “garden variety pullback,” and we could see it before the November 3 presidential election.
And this pullback could see the S&P 500 lose 10 – 15%, and the tech-heavy Nasdaq fall 15 – 20%.
“Markets tend to be very uncomfortable with uncertainty,” Emanuel said. “When you look at the election, it’s clear that the rhetoric is going to get nastier.”
Emanuel says, however, that the bull market is still alive. He expects the market will stabilize and investors will rotate into beaten down, economically sensitive stocks into next year.
“It really comes down to this whole idea particularly of the economy reopening,” Emanuel added. “A lot of the stocks that drove the rally in July and August are the ones that benefited from, for lack of a better word, the COVID trade.”