- The strong post-election day rally in stocks should be used as an opportunity for investors to reduce exposure, according to Fairlead Strategies founder Katie Stockton.
- “We continue to believe the bounce will fail next week,” Stockton said in a note sent to clients on Thursday.
- Weak market breadth and a lack of confirmation in this week’s rally from momentum indicators is behind her analysis.
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Investors should brace for a sell-off in stocks next week after this week’s strong strong post-election day rally, according to Fairlead Strategies founder Katie Stockton.
The S&P 500 pushed up against short-term resistance of 3509 on Thursday, and trading could get choppy from here, she said in a note note to clients Thursday.
“We continue to believe the bounce will fail next week,” Stockton said, pointing to a weak showing in momentum indicators like weekly stochastics and the MACD indicator.
The moving average convergence/divergence indicator (MACD) is a trend-following momentum indicator that visualizes the relationship between two moving averages of a stock’s price. It is designed to reveal changes in the strength, direction, momentum, and duration of trend in stock prices.
Weak market breadth, which measures individual stock participation in an upward or downward move in equities, was also apparent in this week's rally, especially in the small-cap Russell 2000 Index. While this is not necessarily bearish, "it creates a more fragile backdrop prone to volatility," Stockton noted.
Investors, according to Stockton, should use this week's strength as an opportunity to reduce exposure to stocks in the oversold bounce that is underway.
But while Stockton's short-term outlook on stocks is bearish, her long-term outlook on stocks remains bullish.
"The bull market is intact," Stockton said in a Wednesday note, adding that long-term momentum remains positive for the S&P 500. Stockton foresees the S&P 500 trading to 3,775 in the long-term, but with that upside move to be delayed by bouts of short-term volatility.
Investors should take note of Stockton's analysis, as she correctly called recent upside moves in bitcoin weeks before their occurrence.