March 5, 2021

The risk of a stock market correction is increasing as resistance levels come into play, BofA says

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Markets Trader Reaction
A trader reacts during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at Wall Street in New York City.

  • The risk of a stock market correction is increasing as February approaches, BofA said in a note on Monday.
  • Investors should take some profits as a number of indices begin to test upside price targets, according to the note.
  • February also represents a historically bearish month for the market, with negative average returns going back to 1928, BofA said.
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A stock market correction is looking increasing likely in the weeks ahead as several stock market indices begin to test their upside price targets, Bank of America said in a note on Monday.

Upside price targets in the S&P 500 derived from price action seen in late 2020 were reached when the index moved above 3,850 in the past week, according to the bank.

And February is one of the weakest months of the year for the stock market, BofA said, citing historical data going back to 1928. On average stocks see an average decline of 0.11% in the month of February, a median return of just 0.27%, and are positive only 52.7% of the time. 

Besides weak stock market seasonality in February, the current put/calls ratio is signaling a sense of complacency among investors, a sign that is typically seen near market tops, the note said.

The bank also sees a lack of bullish confirmation of the recent stock market rally from the percentage of stocks above their 10-day and 50-day moving averages as a concerning signal.

While BofA remains bullish on the S&P 500 for all of 2021, with a year-end price target of 4,000, a combination of poor seasonality and tactical indicators could mean a sell-off to S&P support near 3,630, representing potential downside of 5% from Friday’s close. Below that level, the S&P should find support near 3,550, representing potential downside of 7% from Friday’s close.

Investors should “take some profits,” BofA said. 

Read more: BANK OF AMERICA: Buy these 31 unheralded stocks as the recovery’s hottest trades of recent months continue to gain strength in 2021

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