The S&P 500 (SPX) fell as much as 4.9% during the past month, although the index has since recovered, bringing its loss to about 2%. However, Raymond James warns that more downside could be just around the corner.
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Raymond James quantitative/technical strategy managing director Javed Mirza noted that “mechanical sell” signals triggered last week in the S&P 500, Nasdaq 100 (NDX), and Dow Jones (DJIA) and cautioned that “equity markets appear to be at risk of an intermediate-term (1-3 month) corrective phase taking hold, with downside potential of 8-10%.”
Watch the S&P 500’s 50-Day Moving Average, Says Mirza
Mirza also pointed to weak market breadth as a warning signal, which has historically led to poor returns in the intermediate-term. Breadth refers to the proportion of stocks moving higher or lower within an index, and weak breadth means only a narrow group of names are contributing to gains.
The S&P 500 is currently trading below its 50-day moving average, and Mirza believes the line will act as resistance for the time being. He adds that a market correction could provide a good opportunity to increase exposure to the information technology, industrials and basic materials sectors.
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