Strategists at Deutsche Bank suggest it could be on the cusp of another pullback, following a previous successful prediction in early April when they anticipated a pause in the market rally.
His forecast turned out to be accurate as the S&P 500 saw a 4.6% drop in the fortnight following his April 5 note.
Strategists have identified three key factors that signal a possible stop in the market’s upward trajectory.
First, they saw a strong increase in equity positioning among both rules-based and discretionary funds, with exposure reaching the 95th percentile of historical readings over the past decade.
Additionally, equity funds have recorded nine consecutive weeks of inflows, indicating a “stretched” risk appetite in the market.
Another contributing factor is the looming buyback blackout period, which precedes the release of second-quarter earnings.
The Deutsche Bank team estimates that companies representing almost half of the S&P 500’s market capitalization will enter blackout periods at the end of next week.
During these periods, companies are unable to buy back their own shares, which could reduce demand for shares and contribute to market stagnation.
With significant capital inflows and high fund exposure, combined with the upcoming lockdown period, the market may need to take a pause, Deutsche Bank strategists concluded.