Technical Strategist Turns Cautious Amid Parabolic Run: 'Healthy Correction May Be Just Around The Corner'

The U.S. stock market has been on such a red-hot run in recent months that even market bulls are starting to say a healthy pull-back could be imminent. On Thursday, Piper Jaffray analyst Craig Johnson said key technical indicators suggest the market has become overbought in the short-term.

We have scaled back our equity exposure in our Model Portfolio as we believe a healthy correction may be just around the corner, Johnson said.

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He said market sentiment is currently at a seven-year high on tax reform optimism, and a handful of key momentum and breadth indicators are painting a very bearish near-term picture for stocks.

From a fundamental perspective, Johnson says the U.S. economy is showing no signs of slowing down. The latest estimates suggest U.S. GDP growth topped 3 percent in the fourth quarter for the third consecutive quarter. FactSet estimates S&P 500 companies earnings growth rate averaged 10.2 percent in Q4.

Sector Analysis

Johnson may be expecting a broad market pullback, but he's more bearish about some market sectors than others. He downgraded the Health Care sector to Underweight based on deteriorating fundamentals in the space in recent weeks. Piper Jaffray also has Underweight ratings on Utilities and Consumer Staples.

On the other hand, Johnson is relatively bullish on Energy stocks. He said optimism about OPEC production cuts has triggered a building bull market in oil stocks. Piper Jaffray is also bullish on the Basic Materials and Technology sectors.

How To Play It

Traders who want to mitigate risks by setting up sector-based pair trades based on Johnsons recommendations might consider the following SPDR ETF positions.

Short ideas:

  • Consumer Staples Select Sect. SPDR (ETF) (NYSE:XLP)
  • Health Care SPDR (ETF) (NYSE:XLV)
  • Utilities SPDR (ETF) (NYSE:XLU)

Long ideas:

  • Materials Select Sector SPDR (NYSE:XLB)
  • Energy Select Sector SPDR (ETF) (NYSE:XLE)
  • Technology Select Sector SPDR Fund (NYSE:XLK)

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