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Stocks could be in for a rough second half.
While the major averages are stuck in consolidation mode, spending much of August swinging back and forth on trade and Federal Reserve developments, the sideways action is likely to end soon, says widely followed Wall Street strategist Sven Henrich.
“Anything can change at any moment,” Henrich, founder and lead market strategist of NorthmanTrader, told CNBC’s “Trading Nation” on Tuesday.
Henrich said the stock market’s gains this year “have been driven purely by multiple expansion resting … on two pillars of support” — investors’ high hopes for future interest rate cuts and their largely unfaltering optimism around the U.S.-China trade dispute.
Now, after the most recent spike in volatility — which is tracked in the market by the Cboe Volatility Index, also known as the VIX or the “fear gauge” — the current layout feels like the calm before the storm, the strategist said.
“I don’t think stocks are out of the woods yet,” he said. “We can certainly move within this range some more, and the S&P could go even as high as 2,950.” That’s 90 points above Wednesday’s premarket level.
While that sounds somewhat bullish for stocks, the real bullish trend is in the chart of the VIX, which could be setting up for another spike to the 28 or 30 level, Henrich said.
“If that were to happen, then I would see that as, definitely, a short-term buy,” he said. “But then I think it’s going to be really up to what the events in September and October bring with regards to the Fed and any potential update on China.”
And, if the Fed’s ability to ward off a potential slowdown fails, stocks could be in for a sustained drop, Henrich warned, pointing to an S&P 500 chart that’s sending mixed technical messages.
“This is not necessarily a bearish chart, but it can be an extremely bearish chart,” Henrich said, emphasizing that if the S&P is unable to break through the upper trend line of this “megaphone” pattern, the downside risks will rise “significantly.”
“That’s all structurally concerning,” he said. “The way I view this at the moment is if central banks can … maintain efficacy in terms of controlling the market narrative with easing, … then this chart can be, obviously, invalidated. But … if this chart and the central banks lose control and we actually do go into a global recession, the downside risk is defined by the chart, which is that lower trend line. And it can head all the way down to 2,100 on the S&P.”
That would represent a nearly 27% drop from the S&P’s current levels, a death spiral seldom seen outside of broad-based bear markets or recessions.
And with the yield curve inversion — which many see as a signal of an oncoming recession — at its worst level since 2007, it’s putting pressure on markets that could bring them closer to Henrich’s bear case.
“We have trend breaks on major markets,” he warned. “If you look at transports, small caps and banks, they’re all charts that are in serious trouble at this very moment, and so they really need to show a turnaround, because the overall market has been significantly weaker vis-a-vis what you see in the major indices.”
Stocks wiped out their early gains on Tuesday and ended trading in the red as U.S.-China trade worries lingered and the yield curve inverted further. They were down further in Wednesday’s premarket.
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