Markets should prepare for a ‘downside correction’ in the fall, technical analyst says

Investors should prepare for a “downside correction” in equity markets in September or October, according to one market strategist. With major stock markets around the world posting an unprecedented recovery in recent months, many commentators have questioned the sustainability of the rally given the external economic risks from the coronavirus pandemic and geopolitical tensions.

Speaking to CNBC’s “Squawk Box Europe” on Wednesday, RW Advisory Strategist Ron William argued that the market is currently beholden to “asymmetric risk” on technical, seasonal and political fronts, identifying a break below 3,000 points on the S&P 500 as the “downside trigger.” The U.S. benchmark currently sits at around 3,257 points.

“The Nasdaq is obviously the most overbought and certainly not representative of the U.S.A and not the world,” William said, adding that the U.K. was “bottom of the list” in terms of RW’s risk-ranking metric, while China’s recent overbought condition has now unwound. “I would suggest that everyone get ready for an August peak and a September or October correction, if not a protracted rolling W crash into year-end,” he added.

William highlighted that despite the rally, “smart money” in equities is at a nine-year low, with much of the rally fueled by Robinhood investors, which he termed a “telltale sign for downside risk.” Smart money refers to capital controlled by institutional investors, fund managers, central banks and various other financial professionals. “Smart money is out, hot money, speculative money is in. That is a big paradigm that we need to be asking ourselves questions on,” William said. “Of course, the Fed has been pumping the market up by record amounts and other central banks have been following suit. Central bank policy can influence liquidity but not insolvency and so this is the 1929 paradigm, because similar things did happen back then,” he said, adding that if “hot air” is driving markets, the downside risk is undoubtedly ahead.

Markets should prepare for a ‘downside correction’ in the fall, technical analyst says, CNBC, Jul 22