The stock market is showing signs that its recent rally could be on the verge of reversing, according to insights from Bank of America’s top technical strategist, Paul Ciana. In a recent client note, Ciana highlighted several “key risks” that could challenge the momentum from a rally that has driven the market to reach all-time highs.
Ciana pointed out that after achieving a summer target of 6,500, the S&P 500 surpassed this mark, coming close to the secondary target of 6,625. However, he raised concerns about several risks that could dampen market performance.
One significant risk highlighted is the historically challenging performance of the stock market during the last ten days of September, especially in election years. Ciana noted that this period tends to observe the worst performance for the S&P 500, with an average return of -1.1% and only a 40% success rate since 1928. The situation appears direr in presidential election years, where the index has only succeeded 29% of the time during this period, showing a deeper average decline of -1.5%. The last ten trading days of September, which begin on September 17, coincide with the Federal Reserve’s next rate decision, raising expectations for potential market volatility.
Another area of concern is the lack of confirmation from the Dow Jones Industrial Average’s recent breakout. While the Dow reached a new all-time high, the Dow Jones Transportation Average, closely linked to it, has shown weakness. Ciana noted that the Transportation Average has not surpassed significant technical levels to confirm the bullish sentiment surrounding the Industrial Average, and it has slipped below its trend line support.
Furthermore, indicators of market breadth— which measure how many stocks are advancing compared to those that are declining— are also signaling potential weakness. Recently, the NYSE advance-decline line has plateaued, and stocks in the S&P 500 that are trading above their 50-day moving average appear to be forming “lower highs.” The decline in the number of stocks considered “overbought” according to relative strength indicators adds to those concerns.
“Increased divergence, especially in a tech-led rally, could exacerbate this situation,” Ciana stated, emphasizing that resolving these issues would require a broader market rally to regain upward momentum. With the prospect of significant risks looming, market watchers will be keeping a close eye on the upcoming trading days and economic indicators.
