The stage is set for a year-end equity rally, according to Cantor Fitzgerald Chief Market Strategist Peter Cecchini.
Cecchini for months has had a year-end 2018 S&P 500 Index target of 2,805, one of the more bearish among Wall Street strategists and just 2.5 percent above the index’s close Thursday. Earlier this month, he said markets may have gotten overextended. He now sees technicals, normalization of the VIX futures curve and declining correlations as factors helping support gains into the end of 2018.
“Major U.S. stock indices may now be poised for a rally into year-end on any lack of bad news,” Cecchini wrote in a note late Thursday. “We might expect a final push higher, as has been the case in 2007 and 2000,” before the S&P 500 violates a monthly technicals trend higher.
Cecchini said he’s going to be watching technology stocks for clues, and will be keying on FAANG shares in particular “to assess the duration of this bounce, but we’re not looking for a sustained advance.”
While he does expect a rally, it’s getting close to the time for hedging, Cecchini said. It’s a bit too early, “if push came to shove, we’d buy Russell 2000 volatility over S&P volatility.”
Crude oil is oversold, Cecchini said, recommending purchase of United State Oil Fund LP (ticker: USO) call options to bet on a comeback. He also said high-yield credit should correlate with equities on the bounce.
This may all be the calm before the storm, though. Cecchini said his 2019 view “is becoming considerably more bearish.” He continues to expect more volatility in stocks and in risk assets generally on tighter global monetary policy conditions.
On top of that, the yield curve “is an equity story not only for banks but also for the broader market, as we feel it (in combination with other factors) is signaling a growth slowdown in 2019 and potentially a recession in late 2019,” Cecchini said.