A market correction is coming, Paradigm Capital says

Feel like the markets are a little toppy after a rally that began last fall? The data is backing that feeling up, says Paradigm Capital analyst Aazan Habib.

In a research update to clients February 4, Habib said that while 2024 still looks like it will be a good year, a correction is likely on the way.

“Red flags popping up as seasonality becomes a headwind in the coming weeks,” the analyst said. “The January barometer adds further statistical support to the bull case for the rest of 2024, although given how closely equities are following seasonal tendencies, we should not be surprised to see a corrective phase begin in the coming weeks. Much of the leading merchandise is currently extended, so a healthy pullback would help reset conditions for the next bull run.

Habib says there are several metrics he is looking at.

“Evidence that supports a seasonal corrective phase: 1) short-term breadth deterioration; 2) overbought warnings on the S&P 500; 3) bellwether NVDA hitting a major technical target; 4) early signs of mean-reversion rotation into defensive sectors such as Consumer Staples; 5) weakening short-term momentum in risk-on currencies such as the AUD; 6) regional banks and real estate rolling over; and 7) a Dow Theory divergence.

The analyst offered up the levels at which he sees key support.

“We would look for important near-term support at around 4850 and 4700 on the S&P 500. A monthly close below 4600 would be the first breach that would make us re-evaluate our longer-term bullish thesis. For the TSX, key support remains 20,500 and 20,000.”