Thus far, 2024 equity markets have overwhelmingly favored the bulls. However, even the strongest bull markets endure pullbacks and consolidations. Below are some reasons stocks are due for a pullback:
Gravity
The S&P 500 Index has gone an incredible 19 weeks without tagging the 10-week moving average. Such a strong rally is incredibly rare. However, even the strongest rallies must eventually correct through time or price. Investors should think of the 10-week moving average as a bungee cord – the further and longer price goes without tagging it, the more likely price will snap back to it.
Image Source: TradingView
Furthermore, the S&P 500 Index is struggling at the 4.326 Fib extension, a technical zone that typically aligns with corrective moves.
Reddit IPO Looms
Social media giant Reddit is set to go public soon under the ticker symbol RDDT. Reddit is one of the most anticipated IPOs in recent memory. However, highly anticipated IPOs can be a short-term hurdle for markets because they can add to frothiness and supply in the equities market. For example, Coinbase’s (COIN) IPO marked a multi-year top for crypto-related stocks and Bitcoin. While I don’t think RDDT will be as impactful, it’s something to watch for.
Quad Witching
“Quad witching” refers to the simultaneous expiration of four different types of financial derivatives contracts: stock index futures, stock index options, stock options, and single stock futures. This phenomenon occurs on the third Friday of March, June, September, and December (one occurs today).
Quad witching can lead to increased trading activity and volatility in the markets as traders and investors adjust their positions or execute arbitrage strategies.
VIX Seasonality
Historically, the month of March tends to be the most volatile month. Over the past few sessions, we have seen volatility creep in. This trend may continue as volatility tends to be mean-reverting and it has been dormant for so long.
Image Source: Equity Clock
Earnings Season is Over
With earnings season in the rear-view mirror, it would be perfectly normal and expected for earnings winners to digest their gains over the next few weeks.
NAAIM Points to Overwhelming Bullish Exposure
NAAAIM (National Association of Active Investment Managers) measures the level of equity exposure among its members, who are typically active investment managers managing portfolios of stocks. The NAAIM Exposure Index reflects the average exposure to the market by these active investment managers.
Image Source: NAAIM
This week, NAAIM flashed its highest bull reading in two years. This can be considered bearish because it suggests that a large portion of active managers have already allocated a significant portion of their portfolios to stocks, leaving fewer investors available to drive further buying pressure.
Bottom Line
Investors should be cautious for the above reasons but also remain flexible and open-minded. The data suggests a multi-week pullback is likely in U.S. equities. Such a pullback would be welcome and would likely provide low risk long entry points to reemerge.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
