Technically Speaking: Is BofA Right About A Market Drop To 3800?

Recently, Bank of America’s Savita Subramanian discussed why the market could drop to 3800. She discussed her thesis in her latest strategy note titled “Five Reasons To Curb Your Enthusiasm.”

This analysis is interesting, particularly when analysts are rushing to upgrade both economic and earnings estimates.

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Market Drop 3800, Technically Speaking: Is BofA Right About A Market Drop To 3800?

More importantly, investors are incredibly long-biased in portfolios, with equity allocations reaching some of the highest levels in history.

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Market Drop 3800, Technically Speaking: Is BofA Right About A Market Drop To 3800?

What Subramanian questions, and something we have asked previously, is all the “good news” already “priced in?”

“Amid increasingly euphoric sentiment, lofty valuations, and peak stimulus, we continue to believe the market has overly priced in the good news. We remain bullish the economy but not the S&P 500. Our technical model, 12-month Price Momentum, has recently turned bearish amid extreme returns over the past year.”

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Market Drop 3800, Technically Speaking: Is BofA Right About A Market Drop To 3800?

With investors “all in,” we suspect a correction is more likely than not.

 

Technical Deviations

While BofA only expects a 10% correction, as shown, there is a risk of a deeper reversion.

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Market Drop 3800, Technically Speaking: Is BofA Right About A Market Drop To 3800?

A correction back to 3800 would only revert prices to mid-2020. As shown, over the last 5-years, corrections have ranged from roughly -10% to -33%. Notably, these corrections usually have reverted the index either to the 200-dma or beyond.

Given the magnitude of the market’s current deviation from the 200-dma, a correction will likely surpass 3800. A retest of the 200-dma seems most probable.

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Market Drop 3800, Technically Speaking: Is BofA Right About A Market Drop To 3800?

Furthermore, the entire market (small, mid, and large-capitalization companies) have all risen sharply in the liquidity-fueled advance from the March 2020 lows. Such provides plenty of fuel for a more significant correction if selling begins in earnest.

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