Tags: Worth | S&P 500 | volatility | market

Technical Analyst Worth: S&P 500 Might Be Headed for 18 Percent Drop

By    |   Thursday, 02 April 2015 07:00 AM

The S&P 500 index may stand only 3 percent below its record high, but Carter Worth, head of technical analysis at Cornerstone Macro, sees signs of danger.

The problem is that major sectors of the index have failed to reach new peaks, he tells CNBC. "The issue is trying to come to a judgment about the market not so much by looking at the market, but by looking at the parts that comprise the whole," he explains.

"So while the chart of the S&P might say one thing, the other parts are giving a different message and that's been the case for the better part of the past 10 to 12 months."

Volatility is another issue. The CBOE Volatility Index (VIX) has soared 22 percent since the S&P 500 hit its record high March 2.

"I would characterize this as a high-volatility, low-variance moment, meaning we have huge daily swings and yet we have no variance. That kind of churn is usually a problem."

So where are we headed from here? "I think the best thing we are hoping for is a '98-type outcome," Worth said. The S&P 500 fell 18 percent from July 1998 to September 1998. "We saw a huge downdraft and then we recovered. We need a reset."

Many others are concerned about the market's activity too. "I do think it is going to be volatile. It is just going to be a bumpier ride," Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, tells The Wall Street Journal.

The S&P 500 fell 2.2 percent last week, and biotechnology stocks were especially hard-hit. The S&P Biotechnology stock index dropped 6.6 percent in the first four days of next week.

Meanwhile, price-earnings ratios indicate stocks may be overvalued. Robert Shiller's cyclically adjusted price-earnings ratio for the S&P 500, which includes 10 years of earnings, stands at 27, topped only by 1929, 2000 and 2007. Those, of course, were periods that preceded market crashes.

And it looks like first-quarter reports will be nothing to write home about, with analysts forecasting a 4.6 percent drop in earnings for S&P 500 companies, according to FactSet.

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The S&P 500 index may stand only 3 percent below its record high, but Carter Worth, head of technical analysis at Cornerstone Macro, sees signs of danger.
Worth, S&P 500, volatility, market
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2015-00-02
Thursday, 02 April 2015 07:00 AM
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