Strategist predicts stocks will decline 10% because the gain is too narrow.

Piper Sandler's Craig Johnson predicts a 10% market slump. A severe pullback would wipe away the S&P 500's year-to-date gains, bringing it to 4,500. Johnson said that drawdown might occur next month.

A 10% stock price correction is imminent. Piper Sandler's head market specialist Craig Johnson says a few technical clues indicate equities that aren't ready to soar yet.

Johnson's estimate contradicts most investors' given the S&P 500's strong climb since October. As AI euphoria and Fed rate cuts rule the market in 2024, the benchmark index keeps hitting record highs.

Johnson said a deeper look at the rally is more worrisome. The previous 18 months have seen all three benchmark indices reach the top of their price range, suggesting a decline.

"You can see that after that big run off of the October 2023 lows that we're now pressing to the upper end of the very well-established 18-month price channel," Johnson told CNBC Wednesday. "Do not start the following segment here. Technically, you don't do it at channel end."

Meanwhile, equities might rise more. Mega-cap tech firms have been booming, but healthcare and financials equities have lagged, indicating that the market upswing hasn't spread.

More proof is needed. Because market breadth has been declining into 2024 "Johnson stated. "This is a market that's probably going to enter an HLTR, or a high-level trading range, and at this point in time being at the upper end of that channel, now is a time where this market is certainly vulnerable to see at least a 10% correction," Johnson said.

A 10% market loss could return the S&P 500 to 4,558, wiping out this year's gains. Johnson projected the correction might occur in March, causing traders problems in the coming weeks.

In recent weeks, traders have stayed positive on stocks despite the prospect of recession or the Fed raising interest rates longer. AAII's recent Investor Sentiment Survey found 74% of investors neutral or positive on stocks for the next six months. The CME FedWatch tool shows markets still price in a 40% possibility the Fed might lower rates by at least 100 basis-points by the end of the year, despite central bankers only forecasting 75 basis-points.

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