Market could see a 10% correction in the coming months: Strategist

Kim Catechis, Investment Strategist at Franklin Templeton, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss outlook on the market.

Video transcript

KRISTIN MYERS: Let's bring in Kim Catechis, investment strategist at Franklin Templeton, now to have a market conversation. So Kim, we're seeing record highs in the markets. But are you expecting this run to continue unabated for the rest of 2021? We've heard a lot of people make mention of volatility and even a potential correction up ahead for the second half of the year? What are you expecting?

KIM CATECHIS: Hi, Kristin. Thanks for having me again. So, yeah, to answer your question, I think the short answer is, we expect the chances of a correction coming up. Let me give you some detail, first of all, though. So we have a talented team of quantile analysts at Franklin Templeton. And one of the things they're pointing out is that whilst the S&P 500 is hitting highs, all-time highs, the percentage of stocks that are above their 10-day moving average is falling.

So, for example, yesterday, down from 88% to 79%, and that's usually a sign of some divergence, you know, bearish, some would say. Similarly, if you look at the ones, the stocks that are above their 30-day highs, it is unusual to see that you're at this full-time high for the S&P index, but only 10% of those stocks is above the 30-day high. So that sets another unusual record.

And last but not least, you've got the put call ratio starting to rise, too. So what it means is essentially, if you look back through history-- and obviously, history tends to rhyme, rather than, you know, exactly copy what happened before-- what I'd say is that it looks likely that we may get up to maybe a 10% correction at some point over the next six to nine months, which would kind of put us to third, fourth quarter.

Having said that, over a 12-month period, in most cases when these events are happening, market's actually higher. And I've got-- if you have a bit of time, I've got another data point for you. And that is the ISM indices, you know, the purchasing managers' indices. So, interestingly, whilst the manufacturing index is up high, it's maybe only the sixth time in goodness knows how many years, it's up this level. But the non-manufacturing one has set a record level. And that's way above 60. So that is really, again, unusual. Now, in a sense, if we just take a step back--

ALEXIS CHRISTOFOROUS: Kim, I'm going to jump in there, Kim. You're looking at that these technicals. Can you tell us what you think or what the technicals are showing you which sector or sectors may push us into that 10% correction that you think we're going to be having in the next six to nine months? Because we've seen that rotation continuing out of tech into value and cyclicals, although, of course, today, that doesn't seem to be the case. But what are some of the sectors that might lead us there?

KIM CATECHIS: Well, I think, obviously, logically, the ones that are taking up the leadership now are the ones that you may see looking a bit more stretched if this continues. And I don't want to overdo this correction talk because 12 months from now, the likelihood is that these earnings are going to keep driving valuations up across the board. I think the interesting point is the narrowness of the market.

So in terms of the leadership, I fully expect that once you've had that step change in comparison of earnings from last year to this year, then I would expect those stocks that have bounced the hardest, you know, cyclicals, et cetera, will probably be the ones that will look choppy.

KRISTIN MYERS: So Kim, I know that you're saying that we can expect some kind of correction up ahead, 10%. What will be the thing to really cause that? What's the catalyst that we should be looking out for?

KIM CATECHIS: Well, some people look at things like the put to call ratio, right, as an indicator-- an early indicator of where people are putting their money. Others would say that you've got to look at the wave of individual investor money in the market as well. And I think what-- there's no one thing that I would identify as being the trigger.

However, I will point to a few factors that may well be the tipping points. So one of them would be if we saw a hiccup in the global growth expectations. And that may be triggered by more difficulties in getting the vaccination programs out, lack of confidence, you know, a loss of confidence there. Because right now, it's really China and the US that are driving the expectations for global growth.

Another area you've got to remember to fix on is the stimulus. And you've just had, you know, [INAUDIBLE] talking about transportation and the infrastructure program. Any indication that that may not come through is clearly going to make-- shake confidence, too.

KRISTIN MYERS: All right, Kim Catechis, investment strategist at Franklin Templeton, always great to have you with us.