The current rally will likely fail, expect S&P 500 to drop below June lows – Fairlead Strategies

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Investment advisor and technical analysis specialist Katie Stockton said Wednesday that the recent rebound in the major U.S. equity averages is likely just a bear-market rally and stocks probably have further to fall before finding a long-term bottom.

“We’re making the assumption that this rally will fail or fade, not too far from current levels,” the founder and managing partner of Fairlead Strategies told CNBC.

Calling the current situation “a proving ground” for the market, Stockton pointed to signals that the rebound from June’s low, when the S&P 500 (SP500) reached a 52-week low just above 3,600, has started to run out of steam.

Specifically, she noted that risk assets have “now come into resistance” and the market has seen the return of short-term overbought signals. This included megacaps experiencing overbought conditions headed into their earnings reports.

At the same time, the Fairlead founder argued that the market hasn’t experienced “any incremental improvements in long-term indicators,” suggesting that the bear market will likely continue to dominate trading.

“So far, there’s some incremental improvement but not enough to suggest that we have some lasting relief rally,” she said.

Assessing the longer-term market, Stockton argued that there was a high probability that the S&P 500 would drop below the June low. She estimated that there was a “closer to 10%” chance that the market has reached a “longer-term major low” signaling an “end to the bear market cycle.”

To support this view, the Fairlead founder spotlighted recent action in the cryptocurrency market, where Bitcoin (BTC-USD) has climbed about 18% since the end of June. Meanwhile, Ethereum (ETH-USD) has jumped about 46% during that time, with Stockton pointing out even more aggressive action in altcoins.

“I think there is a risk appetite out there,” she noted. “It’s not that kind of despair that we would expect after this bear-market cycle culminates.”

For a similarly bearish take on the S&P 500, see why Seeking Alpha contributor Mott Capital Management sees a potential drop in the index.