This month’s stock market losses won’t be the last of the bloodletting, according to Raymond James. Stocks are on pace to close out a brutal month. Although November is usually a seasonally strong month for the market, a pullback in major tech names has weighed on the major averages this time, with the Dow Jones Industrial Average and the S & P 500 each down roughly 2% this month. The tech-heavy Nasdaq Composite has lost more than 4%. But there’s a more severe selloff on the horizon, by Raymond James’ reckoning. According to the Wall Street firm, the S & P 500 could tumble by 8% to 10% in the next three months, after several warning signs flashed last week. These market signals suggest “Portfolio Managers should begin to manage risk control levels, as equity markets appear to be at risk of an intermediate-term (1-3 month) corrective phase taking hold, with downside potential of 8-10%,” according to a note published Monday by Javed Mirza, the firm’s managing director for quantitative/technical strategy. The warning signs include several “mechanical sell” signals that were triggered last week in the S & P 500 , the Dow Jones Industrial Average and the Nasdaq-100 , following a sell signal that flashed in the Russell 2000 the week prior that pointed to underlying market weakness. Ongoing weakness in market breadth and market internals are also troubling, and have historically pointed to a poor intermediate-term outlook, Mirza said. Volatility is triggering short- and intermediate-term “mechanical buy” signals, and portfolio managers are apparently shifting to reduce risk by pivoting toward staples and value stocks. Still, Mirza expects any market correction will prove an opportunity for investors to add exposure to information technology, industrials and basic materials positions. But for the time being, the technical analyst said any counter-trend bounce will not likely last, and will probably stall at important resistance at the 50-day moving average. “Warning signs have appeared for equity markets, suggesting that the turbulent transition from Phase 1 to Phase 2 of the Market Cycle Model is attempting to take hold,” he said.
