'Ominous' market pattern could spark a 10% sell-off, CFRA's Sam Stovall warns
A summer slump may strike stocks.
After the S&P 500 gained 5.5% in July, CFRA's Sam Stovall sees it falling 5% to 10% over the next two months.
"We have a lot of concerns out there — in particular the overbought condition of the market right now, tech and large-cap dominance, the concerns surrounding soaring gold prices, the falling dollar, historically low interest rates, as well as just traditional optimism," the firm's chief investment strategist told CNBC's "Trading Nation" on Monday.
Yet, the market kickoff to August didn't reflect the risks. With potential headway on a coronavirus aid bill and Microsoft announcing its intention to buy TikTok in a multibillion-dollar deal, the S&P 500 and tech-heavy Nasdaq were off to a running start. The S&P gained 0.9%, while the Nasdaq rallied 1.6% to a record high.
But Stovall said the enthusiasm will have a short shelf life.
Stovall, who has been on Wall Street since 1985, warns the market faces "ominous" seasonality in August and September.
"Over the last 25 years, the S&P on average has fallen in price by about 1% [in August]," he said. "Only utilities and technology have been able to eke out advances."
He notes defensive groups such as gold, food distributors and water utilities typically perform best in late summer while consumer discretionary and industrials face the most challenges.
Even though 2020 is far from a typical year, Stovall contends historical trends still apply.
"Certainly, the catalysts change over time. But reactions to those catalysts don't, mainly because of human emotional involvement," he said.
Despite his sell-off forecast, Stovall said he believes the bull market is back. He sees the S&P 500 at 3,435 next summer — a 1% gain from the all-time high hit last February.
He's in the virus vaccine camp, and he's not getting spooked by the weakening dollar.
"It has more to do with the improvement of what is being seen overseas rather than the big concern as to what will likely happen here in the U.S. I don't see inflation becoming a major concern," said Stovall. "We had a similar situation when Ben Bernanke was Fed chair, that he basically flooded the system with cash. But we did not end up buying loaves of bread with wheelbarrows full of dollars."
He expects the dollar will make multinational companies more attractive.
"Investors will do what they normally have done, and in this kind of a scenario I think that they will engage in rotation — rotation among sectors as well as rotation among regions — rather than retreating from stocks altogether," Stovall said.
The dollar index is off more than 5% over the past three months.
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