Markets to see short-term retreat, long-term gains: Strategist

As markets (^DJI, ^IXIC, ^GSPC) enter the second half of 2024, LPL Financial chief technical strategist Adam Turnquist joins Market Domination to share his market outlook.

Turnquist acknowledges the current market strength, noting, "It's hard to argue with record highs almost on a repeated basis here." However, viewing the situation "from a technical lens," he identifies potential concerns. Markets appear overbought, with divergences in market breadth and a steady decline in economic indicators. Based on these factors, Turnquist anticipates a short-term market pullback.

Despite this near-term caution, Turnquist maintains a positive long-term outlook. He advises investors "to buy the dip" but warns against chasing the current rally.

Turnquist calls the current market a "field of dreams bull market," explaining to Yahoo Finance, "If you build it, they will come, meaning the mega-caps lead, and some of the smaller caps and other sectors follow."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Angel Smith

Video Transcript

For more on the markets.

We're joined now by Adam Turnquist LP L. Financial Chief, technical strategist, Adam, it's always good to have you on the show.

Um Maybe Adam, let's throw a big picture.

You look at the S and P 500.

What are the charts telling you here, Adam, at least in the, you know, kind of near to intermediate term.

Thanks Josh and appreciate being on.

Look when you step back and look at the market.

It's hard to argue with record highs almost on a repeated basis here.

But when we view it from a technical lens, we're very overbought.

We're getting very close to retesting the upper end of this rising price channel that's been in place really going back to the lows of October 2022.

And we're also getting divergences in market bread last week.

On Friday, we only had 4% of it and P 500 stocks make new 52 week highs.

That number steadily declined.

You compare that to the rally to the March highs when it was advancing, you had broad participation, really not the case.

We're seeing a long list of divergences at the bread level and even at the economic level, when you look at some of the ISM services data last week, manufacturing both dipping into contractionary territory.

So what does it all mean on a shorter term basis?

We think we're probably due for a little bit of a pullback here.

Uh What does it mean on a longer term basis though?

I mean, because we've seen some shorter term Pullbacks.

Bread hasn't been good for a long time.

So how can that continue sort of indefinitely longer term?

We think the strategy here is to buy the dip.

We don't think you need to chase this rally right now.

Just given how overbought the market is, look at where leadership is, especially in the semiconductor space, very overbought, having a good day today.

But even if you look at the NASDAQ composite, it's a 20% premium.

It's 200 day moving average, that's over a two standard deviation move historically, when you look at that and compare it to weak breath, you typically get a pullback and that's really the playbook as we look ahead to the second half.

And Adam, you know, we talk a lot about this narrow leadership.

Do you see signs the charts of any kind of, you know, real rotation?

Not yet, we've thought of this market is really the kind of a field of dreams bull market.

If you build it, they will come.

Meaning the mega caps lead some of the smaller caps and other sectors follow.

But we're really not seeing that take place right now.

And I think that speaks to some of the weaker economic data that we're seeing.

A lot of the economic surprise index is now moving into negative territory.

That wasn't the case last year when we had most of the economy surprise of the upside given the recession call that started 2023.

Um We've also been watching, um, and this is a chart that we flagged earlier that socks are making these records at the same time that profit estimates are moving up.

Um And so does that what tends to happen?

Well, you know, I, I guess profit expectations are also at record highs according to this chart from Bloomberg.

Um, but what tends to happen when you see that kind of movement, we think the bar has been raised for earnings as we look ahead and, and kick earnings off on Friday with some of the big banks looking at quarterly earnings growth around 8 to 9% on estimates.

Think back we've come out of an earnings recession over the last year.

So earnings momentum is definitely there, but it's all about reality and expectations.

And I think the expectations are now a little bit higher than they were given a couple quarters ago for the S and P 500 at least Adam, I, I know you can't talk specific names, but I, I am interested if you pop up in the hood of the SPX.

Are, are there sectors?

Technically speaking that you think look more attractive Adam right now, we like communication services.

We think it provides a good barbell in terms of mega cap exposure, but you also get some of the more defensive qualities and the legacy telecom names that looks attractive.

Industrials is another theme that we like when you think about infrastructure spending also has a, a bit of an A I play with data center, not only build outs but storage and then energy is a more defensive play.

It's relatively cheap compared to the broader market, great free cash flows in that sector and a likely spot for rotation.

If we see some money come out of tech, what what what in turn to the sticking with those technicals though Adam, what you know, looking at the sectors, which, which ones would you avoid avoid here at least near to intermediate term?

Yeah, right now we think health care is going to be a laggard that was a recent downgrade from our house view.

It's consistent underperformer even though it does have some defensive qualities.

Right now, we're just not seeing it on the technicals continues to put new lows in versus the S and P 500.

So that would be an area we avoid.

Adam.

Thanks so much.

Good to see you.

Thanks for having me.