Bruce Kamich has been a technical analyst evaluating markets professionally for 50 years. He's seen plenty of bull and bear markets during his career, providing valuable experience that helped him correctly call the bear market in 2021 and, more recently, the bull market rally in stocks in April.
Kamich recently updated his market view. What he says could happen to stocks next likely won't win him many fans among investors.
The recent bull market rally didn't surprise everyone
When Kamich penned a bullish outlook in mid-April, there was plenty of reason to think he was wrong. The stock market was still digesting a swoon caused by the failure of Silicon Valley Bank in March, and worry over a recession was mounting.
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Yet Kamich was spot on in his prediction that stocks were heading higher. He had liked what he saw in the price charts of major indexes, including the S&P 500, and individual sectors, such as technology stocks and consumer discretionary stocks — two sectors that have done remarkably well since then.
His bullish view early in the second quarter was particularly notable because Kamich was among the few Wall Street analysts who believed in 2021 that we were on the cusp of a bear market decline.
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The S&P 500 never reached Kamich's 3,000 downside target, halting its slide near 3,500. Still, the benchmark index did tumble about 20% last year, and many stocks fell by 50% or more, surprising investors.
Since Kamich has made two money-making forecasts in a row, listening to what he says now could be wise.
The stock market could face another big wave lower
It's not easy building a multi-decade career in the stock market. The industry's "what have you done for me lately" nature makes the list of those still actively offering their take on the tape 50 years later small.
Yet Kamich is still parsing prices, volume, and indicators daily for clues to what may happen to stocks next.
Recently, he reviewed the charts of major indexes and sectors again. His conclusion is that stocks could be on the precipice of another big leg lower.
"We are nearly four months on, and the technical signals are weakening, and potential storm clouds are rolling in, I believe," wrote Kamich on Real Money.
Higher Treasury bond yields are one big reason for Kamich's concern. Stock valuation models often use the 10-year Treasury bond yield as the risk-free rate. That yield had declined notably since last fall. However, a downgrade of U.S. debt by Fitch, a closely watched rating company, on Aug. 2 has reversed the trend, putting them on a potential path higher.
"Yields have made a nine-month bullish continuation pattern. A continued rise in yields for this key maturity could be the reason (if we need to find a trigger) that stocks soon turn lower," writes Kamich.
Kamich used a point-and-figure chart to map the likely path for 10-year Treasury yield. His calculation suggests that a 6% yield is possible. If so, higher yields would devalue future earnings in valuation models, creating a stiff headwind for stocks. Currently, the 10-year Treasury yield is about 4.1%.
"I doubt if the stock market is discounting a 6% yield at this point in time," says Kamich.
The potential path for yields isn't the only thing that's worrying Kamich. The patterns that had made him bullish on key sectors like technology and consumer discretionary have also changed.
After reviewing the Consumer Discretionary Select Sector SPDR Fund ETF (XLY) -) chart, he writes:
"The [consumer discretionary] chart suggests a pullback or correction is close to starting. Prices made a high in July and have dipped towards the rising 50-day moving average line. The OBV [on-balance volume] line has hit a high in July, and the 12-day price momentum study has been making lower highs since June, telling us that the pace of the advance has weakened."
His takeaway on the Technology Select Sector SPDR Fund (XLK) -) isn't encouraging, either.
"Technology was a big winner in 2023...but prices are now testing the rising 50-day moving average line. The OBV line looks like it has been "rolling over" in June and July. The 12-day price momentum study shows us weakness from June to July for a bearish divergence and early warning of a possible decline," says Kamich.
His view on the other major sectors largely echoes his technology and consumer discretionary comments, suggesting there aren't many places to hide if stocks retreat. As a result, Kamich warns that investors may not have long to prepare for a substantial move lower.
"Traders and investors should take appropriation action. Sell calls, sell stock, buy puts, etc. This is not a drill. We may have a window of time until the middle of September, just five weeks away, to "get set up for the next decline," concludes Kamich.
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