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Investing.com -- The S&P 500 is facing its greatest downside risk since the April lows, according to BTIG, which warned that “over the next few weeks, equities are the most vulnerable to a downside move since the April lows.”
The bank pointed to stretched valuations and signs of weakness in several corners of the market.
“High volatility names were as extended as they have ever been. We are starting to see those reverse lower, along with many other areas like retail favorites,” BTIG said.
Private equity, meanwhile, “suffered its worst decline yesterday since April.”
BTIG noted that investor complacency has become more evident. “The 5 DMA of the equity put/call ratio is down to .49, near the lows of the year. Sentiment surveys have been creeping higher, and speculative names have been going parabolic,” analysts said.
A test of the S&P 500’s 50-day moving average (6446) would represent “the largest pullback since April,” but BTIG argued this would still be a modest 3.8% decline from recent highs and “consistent with what we have seen in 18 of the last 20 years.”
Other risk factors include divergence between crypto and equities. “Bitcoin and NDX have a tight correlation, but BTC has been rolling over the last couple weeks. This suggests downside risk for NDX,” BTIG said.
The bank also pointed to weakness in lagging sectors such as hotels, restaurants, truckers and private equity, alongside a fragile outlook for Europe, where the German DAX “hasn’t made a new high since early July, and is threatening a multi-month support violation.”
Despite the near-term risks, BTIG expects a pullback could “set-up an attractive entry point for a rally into year-end.”