Top Analyst: ‘Very Abnormal’ Trading Pattern In Stock Market Suggests More Market Pain Is Coming

Top Analyst: ‘Very Abnormal’ Trading Pattern In Stock Market Suggests More Market Pain Is Coming

abnormal trading
Top analyst: ‘Very abnormal’ trading pattern in stock market suggests more market pain is coming. Image of Julian Emanuel, chief equity and derivatives strategist with financial services firm BTIG: CNBC video / https://www.youtube.com/watch?v=DVC7V-8jcVM

U.S. stocks could fall by as much as 20 percent from all-time highs because investors are too optimistic and still driven by “fear of missing out”, according to Julian Emanuel, chief equity and derivatives strategist with financial services firm BTIG.

Another deep market pullback is coming despite Monday’s comeback, Emanuel told CNBC‘s “Trading Nation” on Monday. 

“Rather than fear being priced in the options market, there’s fear of missing out. The price of out-of-the-money calls, as was the case throughout August, is still trading at a premium to the price of out-of-the-money puts,” he said. “That is a very abnormal position. That tells us that the public is still very committed — as are the large institutional investors.”

He predicts the tech-heavy Nasdaq will fall up to 20 percent from its all-time high of Sept. 2 and the S&P 500 will fall up to 15 percent with a second wave of selling before the Nov. 3 presidential election.

Emanuel warned of a tech bubble in August too, but he still believes the bull market is alive. “It really comes down to this whole idea particularly of the economy reopening,” he said. “A lot of the stocks that drove the rally in July and August are the ones that benefited from, for lack of a better word, the Covid trade.”

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Retail investor appetite, increasing volatility and a contested U.S. election are all reasons for a correction, Emanuel said.

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Wall Street’s favorite investor anxiety indicator, the VIX index is trading around 26 after spiking as high as 69 during the mid-March coronavirus markets crisis.

The stock market should prepare for volatility after Election Day, said Michael Schumacher, head of rates strategy at Wells Fargo, Tuesday on CNBC’s “Trading Nation.”

“Normally, you might think that it’s Election Day or Election Day plus one that is super volatile,” Schumacher said. “But this year, markets are saying ‘Hey, wait a minute. We see a lot of vol after the election.”