Stock market news: Rally on last legs, deep and prolonged correction coming

Edouard
Manet’s “The Bullfight.”

Wikimedia
Commons

• The longest bull run in US stock-market history is on
  its last legs, according to a team of technical analysts at
  Societe Generale.
• The team says Elliott Wave Principles point to a
  stock-market top that is going to produce a “deep and prolonged
  correction.”
• Wall Street strategists are mostly bullish for 2019,
  with an average year-end price target of 3,052.

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The
longest bull run in US stock-market history is on its last
legs, according to one Wall Street bank. 

“In our view, the bullish cycle that began in 2009 is ending,”
Societe Generale’s technical team, led by Stéphanie Aymès, said
in a note sent out to clients on Monday.

“Precisely, the famous wave 5, i.e. the last wave of the cycle
according to Elliott Wave Principles, has met its key objectives
on the S&P500 and Nasdaq. The occurrence of bearish
divergences on long-dated indicators and possibly the beginnings
of bearish reversal patterns (Head and Shoulders) suggest that
the US equity indices may be topping out and that a distribution
phase is commencing.”

The Elliott Wave Principles identify up-and-down trends in the
market, using the assumption that human behavior moves markets in
identifiable cycles, especially as traders act like a herd. What
goes up eventually comes down. A complete cycle has eight waves —
the first five (numbered one through five) are the impulsive
waves, while the last three (labeled A, B, and C) are the
corrective waves.

The S&P 500 has seen nearly 10 years of gains after bottoming
out in March 2009. Along the way it has experienced six
corrections — or declines of at least 10%, and a few more
close calls — but what is about to transpire has the looks of
something bigger.   

According to Soc Gen, the recent halting of bullish momentum just
shy of the initial target for the fifth and final wave of the
cycle (just shy of 3,000) resembles what happened just before the
sharp sell-offs in the first quarters of 2016 and 2018. The
selling that ensued erased 25%-30% of the previous up move, and
that is likely what will happen here. When support breaks down,
expect a “deep and prolonged correction,” the bank said, without
giving a specific target. 

Societe
Generale

Soc Gen’s call goes against the grain of what most of the other
Wall Street banks are saying. Strategists surveyed by Bloomberg
are expecting the S&P 500 to close out next year at 3,052 —
about 9% above where it ended on Monday. That’s not to say that
everyone is on board with the idea of a higher stock market in
2019. 

Read more:


‘It ends next year’: What Wall Street’s biggest firms are
forecasting for the stock market in 2019, and where they say you
should put your money

Morgan Stanley strategist Michael Wilson, who has been warning of
a “rolling
bear market” all year, believes the majority of the declines
have already occurred, with the market having fallen as much as
11.47% from its September peak. 

“The Rolling Bear market is now better understood by the
consensus; and more importantly, it is better priced, with
forward P/Es falling 18% from peak to trough,” he wrote in a
recent note. “In short, while 90% of the price damage has been
done by this bear, we’ve likely only served 50% of the time.”

Wilson says that there is more than a 50% chance of a modest
earnings recession in 2019 but that the market should look past
that as the Fed pauses its rate-hike cycle in the middle of next
year. He has a 2019 year-end S&P 500 target of 2,750 — just
below its current level.