Over nearly a century’s worth of market data, the S&P 500 Index has surged to its 12th best start to a year and the best presidential election year kickoff on record. Despite various turmoil including regional banking concerns, new warfare, and inflation worries, stocks have defied odds, scaling the metaphorical Wall of Worry.

The quest on investors’ minds now is the potential lifespan of this equity bull run. The investment horizon greatly shapes this query. While steadfast long-term investors continue to incrementally pour earnings into S&P 500 Index, the tailwinds from a strong initial rally often carry forward, propelling the bull market further. Yet for active traders, competitive margins at current levels paint a less lucrative picture than before.

Outlook for a Late Summer Stock Market Correction

This year’s market antics serve as a textbook example of the futility in predicting market peaks or troughs. There is merit in heeding risks and rewards through meticulous data analysis. Should the risk-to-reward ratio become less enticing, investors may opt to stash cash aside, awaiting a potential equity dip. Below lie five reasons why a late summer downturn may be in the cards for U.S. equities:

1. Seasonal Stock Market Patterns

Historic patterns spell out that the Nasdaq tends to rally till mid-July, stall momentarily till late October, then rally anew toward year-end. Currently, the Nasdaq adheres to this seasonal script with precision.

Image Source: Almanac Trader

2. NAAIM Exposure Index

The NAAIM Exposure Index gauges active investors’ average commitment to U.S. equity markets. Presently, NAAIM signals a robust 103 reading, indicative of full investor exposure including margin. Past instances of such levels heralded short-to-medium-term market corrections.

Image Source: NAAIM

3. Limited Market Leadership

The forceful performance of mega-cap equities has artificially buoyed major stock indices. Still, current market participation metrics exhibit alarming extremity. The fraction of S&P 500 components outshining the index over a 21-day span has plummeted to an all-time low (data sourced from Dean Christians (@deanchristians)).

Image Source: SentimenTrader

4. Moving Averages & Big Round Numbers

The Nasdaq 100 ETF (QQQ) finds itself over 8% above its 50-day moving average. In my observation, such stretched levels typically lead to correction or at least lateral movement. Additionally, QQQ edges near the psychologically significant $500 milestone.

Image Source: TradingView

5. Elections Uncertainty

Pre-election jitters oftentimes spur market volatility during election years. The current political climate in the U.S. stands at its most polarized in recent memory. Rumors swirl post a lackluster debate performance, hinting at potential Democratic ticket shifts. Daily fluctuations in polls and Vegas odds create an aura of uncertainty, promising vigorous trading in the ensuing months.

Concluding Thoughts

The market basks in one of its most stellar beginnings in 2024. Nonetheless, several indices hint at a looming short-term correction.