- Stocks are flashing technical signs that look like risks to the market's rally, BofA said.
- A top technical strategist at the bank highlighted three things for investors to keep an eye on.
- The market often enters its weakest stretch during the month of September.
The stock market is flashing a handful of signs that the latest rally may be about to reverse course, one of Bank of America's top technical strategists said.
Paul Ciana, the global chief technical strategist at BofA, said in a client note on Monday that the market looks like it is facing a handful of "key risks" from a technical perspective. Those factors could challenge the recent rally that's pushed the market to all-time highs.
"After reaching our 6,500 summer target, the SPX rose to another new high. Our 6,625 secondary/overshoot target is within striking distance," Ciana wrote.
Here are some of the risks he's watching.
1. Worst 10 days of the year are approaching
The S&P 500 has been historically weak in the last 10 days of September during election years.
Bank of America Global Research/Bloomberg
The summer-to-fall transition tends to be rough for stocks, with the S&P 500 typically seeing its worst performance in September. But the market could now be on the cusp of the worst week-and-a-half-long stretch of the year, Ciana wrote.
Historically, the last 10 days of September tend to have the largest downside risk for stocks. The S&P 500 is only up 40% of the time during that period with an average return of -1.1%, according to the bank's analysis of stock data dating back to 1928.
The outlook looks even worse when it's a year that kicks off a president's term in office, like 2025. In the first year of a new presidential cycle, the index is only up 29% of the time and posts an average return of -1.5% during the last 10 days of the month.
Ciana noted that the last 10 trading days of the month are set to begin on September 17. That coincides with the Fed's next rate decision, which investors generally expect to be a volatile day for trading.
"The first 10 days are weak, too, but so far this year the market has looked past this," Ciana said of the long-running pattern.
2. The Dow hasn't confirmed its recent breakout
The Dow recently slipped below its trend line support, Bank of America said.
Bank of America Global Research/Bloomberg
The Dow Jones Industrial Average recently ascended to a fresh all-time record, but the Dow Jones Transportation Average, a separate index that's linked to the benchmark index, has lagged.
"The Transportation average has not broken above anything relevant to confirm the breakout," Ciana said of the Dow Jones Industrial Average's recent rally.
The Dow Jones Transportation Average also recently dipped below its "trend line support," and its 200-day simple moving average is declining, according to BofA's analysis. Those could be interpreted as signs that the index is losing momentum.
3. Breadth signals are weakening
Several indicators of market breadth—which measure the proportion of stocks that are rising versus those that are falling—are starting to pull back.
The NYSE advance-decline line, which measures the number of stocks listed on the NYSE that are rising versus falling, has stalled recently.
Meanwhile, stocks in the S&P 500 trading above their 50-day moving average look like they're making "lower highs," Ciana said.
The number of stocks in the S&P 500 that register as "overbought" according to the relative strength indicator has also declined.
"A tech led rally could exacerbate these divergences. To positively resolve them, a broad market rally will be needed," Ciana said.
The post Bank of America flags 3 signs that the stock market may be heading for a decline appeared first on Business Insider