Bearish trend signals stocks are vulnerable to a 10% to 15% correction

The market seems to be doing something that happens before corrections.

When the S&P 500, Nasdaq and the CBOE Volatility Index rise together, BTIG’s Julian Emanuel warns that this is often a precursor to a 10-15% decline.

“Whenever we’ve seen that through early 2018, we’ve been essentially weeks away from a correction,” the company’s chief equity and derivatives strategist told CNBC’s “Trading Nation” on Monday. “The last one was in September last year. We believe history could indeed repeat itself.”

According to Emanuel, the downward trend has been going on for a few months.

“You could swap back for 4,000 [on the S&P 500]”, he said. On Monday the index fell 0.18% to close at 4,387.16. The S&P 500 is up about 17% so far this year.

Emanuel suggests that mounting fears of a Covid-19 Delta variant create a more precarious situation for stocks during a seasonally difficult time.

“Four or five weeks ago we really weren’t really worried about the Delta variant,” he said. “It is entirely possible that the [economic] The growth we expect could come a little more slowly. “

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However, Emanuel, a long-term bull, thinks short-term problems are healthy as it would give the market an important boost.

“His leadership was a little too focused,” said Emanuel.

His concerns mainly relate to a handful of large-cap growth and big-tech stocks.

“With these valuations, and as much as these stocks have gone, we believe they are indeed vulnerable, especially given the potential for China as a wildcard going forward,” added Emanuel.

“China looks very interesting as a contrary game”

Despite his reservations about investing in US companies with significant China exposure, Emanuel wouldn’t ignore it entirely either.

“Buying China here is an idea, not for the faint of heart,” he said. “The options market in particular sends the kind of near panic message we saw at the end of the pandemic lows.”

Beijing cracks down on US-listed China stocks. On Trading Nation last month, economist Stephen Roach, who served as chairman of Morgan Stanley Asia, warned that the actions signaled the early stages of a Cold War.

However, Emanuel believes China could be worth the risk to investors. He notes that it is trading at its lowest level in 25 years when compared to the United States.

“China looks very interesting as a contrary game,” said Emanuel. “There’s definitely an opportunity that could actually come at the expense of those Nasdaq stocks that have been so popular over the past few months.”

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