When Carley Garner told investors that stocks could re-exert themselves in April, there were plenty of reasons to doubt her.
The stock market had just finished selling off from early-year gains, leaving many skeptical that the S&P 500 index could move to new highs.
Recessionary worries were increasing, banks were failing, and professional money managers were so risk averse that they'd been sitting on cash levels above 5% for seventeen months -- the longest stretch since the dot.com bust over twenty years ago.
Yet Garner's analysis of the S&P 500 futures market led her to believe big money wasn't just sitting on the sidelines. They were downright bearish, shorting S&P 500 futures at a rate last seen in 2007. This overly negative positioning led her to conclude that the S&P 500 would rally, a prescient call that's paid off nicely for those who listened.
This week, Garner's back at it, updating her thoughts on what could be next for stocks.
Will the S&P 500's Rally Continue?
The bearish positioning that led Garner to correctly predict the S&P 500 could eclipse 4170, sparking "FOMO floodgates" to open, has disappeared.
According to the Commitment of Traders report, large speculators no longer hold an outsized short position in the E-mini S&P 500 futures. Without that tailwind, stocks may struggle short term.
"As we move into late summer and early fall, the odds favor a market correction," writes Garner in a post on Real Money Pro.
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Garner's concern with the S&P 500's short-term prospects is influenced by the fact that stocks often struggle to gain ground during summer. Over the past 15 years, E-mini S&P 500 futures have weakened beginning in late July, according to research from MRCI.
"Most years, this is simply a pause before staging a year-end rally, yet, those that follow markets know some of the biggest corrections occur between the summer and Santa Claus rallies," writes Garner.
The U.S. dollar could also deal stocks a blow. The dollar is down since May, but Garner believes it may rally soon. If so, stocks benefiting from a weaker dollar improving demand overseas may retreat.
"Thus far, we've seen some buyers show up to defend the [U.S. dollar] trendline. If they succeed, as expected, a return to 103 or 104 is probable. The higher dollar would likely weigh on risk assets such as the stock indexes and crude oil," says Garner.
Sentiment is also problematic. Based on seven different sentiment measures, CNN's Fear & Greed index has been flashing "greed" since early June. That's a red flag.
Given this backdrop, a pullback that works off bullish optimism wouldn't be shocking.
Nevertheless, long-term investors may not want to overreact. Garner is still a fan of the S&P 500 longer term.
She believes the dollar will ultimately sell off again to new lows, and stocks will return to their winning ways.
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How high could the S&P 500 eventually go?
"Earlier this year, we put out chart analysis suggesting the S&P could eventually see a little over 5000 (it was not a popular opinion). We haven't forgotten that, nor have we changed our long-term view," concludes Garner.
