- The longest bull run in US stock-market history is on its last legs, at least in the view of a team of technical analysts at Societe Generale.
- The team says Elliott Wave Principles point to a stock-market top that will produce a "deep and prolonged correction."
- Wall Street strategists are mostly bullish for 2019, with an average year-end price target of 3,052.
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% to 30% of the previous up move, and that is what Societe Generale thinks will most likely happen here. When support breaks down, expect a "deep and prolonged correction," the bank said, without giving a specific target.
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 Monday. But that's not to say that everyone is on board with the idea of a higher stock market in 2019.
The Morgan Stanley strategist Michael Wilson, who has been warning of a "rolling bear market" all year, thinks most of the declines have already occurred, with the market having fallen by 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 Federal Reserve pauses its interest-rate-hike cycle in the middle of next year. He has a 2019 year-end S&P 500 target of 2,750 — just above its current level.