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Stocks are still hovering close to record-highs, but a look under the hood of the market shows a more worrying outlook ahead for equities, JPMorgan says.
Jason Hunter, a technical strategist at the bank, said investors may want to consider selling some of their stocks, citing the bank’s technical analysis of the S&P 500 and other areas of the US market. Though major indexes are still “bullishly trending” and haven’t flashed “any clear warning signs,” the market is flashing several technical signals that suggest stocks could face seasonal weakness.
The August to October period is often the market’s worst-performing three-month stretch of the year. Dating back to 1928, the S&P 500 saw an average loss of 0.02% during that period, with the average correction in down years being 7.35%, according to an analysis from Bank of America.
Seasonal weakness in stocks through the early fall has historically been more pronounced during midterm years of a presidential cycle. In all midterm years since 1974, the S&P 500 has seen a median return of 0% from August 1st through the election day in November, Goldman Sachs said.
“A deeper look at market internals, shifts in leadership, and the technical setups across a number of markets that typically lead to concerns heading into late-summer/early-fall bearish seasonality,” JPMorgan’s Hunter wrote in a client note last week, highlighting various bearish technical signals that had flashed recently.
“While we would not act aggressively to reduce risk just yet, we suggest maintaining trend-following like stop-loss strategies for long exposure and would look to reduce long exposure heading into early September if the current conditions remain the same,” he added.
Here are the technical signals that the bank says it’s watching:
1. The S&P 500 has remained below its next resistance level
Hunter said the benchmark index faces its “next layer of resistance” around 7,909 to 7,935. The S&P 500 rallied to a fresh all-time high of 7,816 recently, but has remained well below that range, Hunter said, though he noted that the index remained above its “support zone” of 7,521 to 7,620.
“The internals noted above keep our attention fixed on the two key risks we highlighted in our prior updates. First is the dichotomy between the AI hardware names and the hyperscalers, and the similarities in the market trends that led to the March 2000 peak in the communications equipment capital investment cycle trade theme,” Hunter said.
JPMorgan remains bullish on the S&P 500 overall and recently lifted its year-end target for the benchmark index to 8,000. Still, strategists have flagged worrying similarities between the current tech rally and the rally that led to the burst of the dot-com bubble. One of them is the growing divergence between hardware stocks and the stocks of the biggest AI spenders, which was also seen near the peak in 2000.
“The medium-term trend deceleration near longer-term channel resistance, the recent switch in market leadership, and vulnerable setups for the former leadership in the AI segment of the market could favor trimming exposure in early-September and as seasonality turns negative, if the noted risks persist through that period,” Hunter later added of the S&P 500.
2. Value and financial stocks are approaching key resistance levels
Value and financial stocks have outperformed recently, but that trend may be about to slow, Hunter said.
The S&P 500 Value Index and financial stocks in the benchmark index, for instance, are each up 2% over the last month. Both areas of the market also remained above their 50-day moving averages during the latest sell-off in momentum stocks, Hunter added.
“While there is no material sign of buyer exhaustion on either chart at the moment, both indexes are approaching long-term channel, trend line, and Fibonacci swing objectives,” he said, referring to several highly watched technical resistance levels.
“We suspect that the indexes will decelerate into that resistance and set the market up for a period of consolidation and mean reversion into the fall,” Hunter added.
3. Software stocks are close to testing a key resistance level
Hunter pointed to the latest pullback in software stocks. The S&P 500 Software Industry Group Index has fallen in a “key resistance zone” of 7,749 to 8,078, Hunter said.
“We are closely watching the price action into September for further evidence of a short-term top pattern in that resistance zone,” he wrote, pointing to 7,407 as one support level to watch.
“We are looking for signs of rally exhaustion near that resistance area and a mean reversion within the broad trading range,” he later added.
4. Chip stocks and hyperscalers are also trading below key levels
The Philadelphia Semiconductor Index is “stalling” at a short-term resistance level of around 12,362 and 13,047, Hunter said.
“In our view, that confluence of levels separates a dead cat bounce from the resumption of the multi-year rally. Continued trading below that area into the post-Labor Day period would leave the index vulnerable to another round of sharp selling pressure into the fall,” the note said of chip stocks in particular.
Hyperscaler stocks are seeing a similar pattern, with JPMorgan’s basket of hyperscaler companies approaching “nearby Fibonacci, trend line, and pattern-based resistance levels,” Hunter added.
“With both the hardware and hyperscalers still trading below key resistance levels heading into the bearish seasonal period for equities, we are concerned that another round of weakness is less a rotation from hardware to hyperscalers and instead, a broader selling pressure across the entire AI theme,” he said.
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Jennifer Sor is a senior reporter at Business Insider. She covers financial markets and the economy, with a focus on retail investing, job trends, and the pursuit of wealth. She regularly speaks to famed forecasters and top investors in markets, and her work has been referenced in outlets such as CNN, Forbes, and Bloomberg Opinion’s “Money Stuff.” She also regularly appears on television and radio to speak about markets and the US economy.Prior to her time at Business Insider, Jennifer covered tech and business news at the San Francisco Chronicle and Los Angeles Business Journal. She graduated from the University of California, Santa Barbara with a bachelor’s degree in economics and English.Have an interesting story to share? Please reach out to her at jsor@businessinsider.com or @jennreports.81 on the encrypted messaging app Signal.
