An analysis from Beth Kindig's I/O Fund suggests that while the S&P 500 is likely overdue for a correction, this expected downturn will present an “exceptional buying opportunity” for investors.
The report, authored by Portfolio Manager Knox Ridley, outlines several key technical signals that indicate an overbought market is ripe for a healthy pullback, rather than a crash.
What Happened: The analysis highlights a significant divergence in market breadth, where the S&P 500’s new highs are not being confirmed by a majority of leading indices.
“While the market continues to push higher, it has been doing so without the support of key stocks and sectors,” the report states. Of the eight key markets monitored for confirmation, seven—including Small Caps, Semiconductors, and the Advance-Decline Line—are currently diverging from the index.
Furthermore, the newsletter points to fading leadership within the Magnificent 7 tech stocks, which have driven much of the bull market.
Only three of the seven stocks— Nvidia Corp. NVDA, Meta Platforms Inc. META, and Microsoft Corp. MSFT have surpassed their 2024 highs, with the others either range-bound or in downtrends.
The analysis also cites a proprietary “Margin Risk Indicator” from WealthUmbrella, which has hit a rare reading of 13, historically preceding a correction.
Despite these warning signs, the I/O Fund remains optimistic about the long-term trend, believing the nature of the coming correction will set the stage for another buying opportunity.
The note mirrors the I/O Fund’s plan from February, where they highlighted that the market is, once again, setting up for a correction, which will likely set up another excellent buying opportunity.
“If the upcoming correction holds above critical support, we believe it will set the stage for another exceptional buying opportunity,” the note stated.
Why It Matters: The note offers a critical perspective on the current state of the market, moving beyond the simple narrative of the S&P 500 reaching new highs.
For investors, this analysis provides a valuable check-up on the market’s health, revealing potential weaknesses that could impact their portfolios.
The diverging market breadth, fading Magnificent 7 leadership, and overbought market conditions can drive a “buyable” correction, benefiting investors in an environment where macro conditions could further support stocks if the Federal Reserve cuts rates in September and the Donald Trump administration secures more deals with U.S. trading partners.
Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, declined on Tuesday. The SPY was down 0.51% at $627.97, while the QQQ declined 0.68% to $560.27, according to Benzinga Pro data.
On Wednesday, the futures of Dow Jones, S&P 500, and Nasdaq 100 indices were trading higher.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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