BTIG’s Julian Emanuel believes the Reddit frenzy will play a major role in a market sell-off this summer.
On Monday on CNBC’s “Trading Nation,” Emanuel compared the current backdrop to the end of January, when the craze was in full swing. Weeks later, wild swings put pressure on major indices as retail investors took profits.
“We all know the video game retailer [GameStop] was really leading the charge at that point, “said Emanuel, chief equities and derivatives strategist at BTIG.” Essentially, this threw a month or two violently to the side to curtail activity in the market at broad sense as speculation arose. “
This time around, according to Emanuel, the fallout could be more serious. If the flip side of the Reddit mania plays out as Emanuel predicts, he warns that it will also come amid more intense inflationary concerns on Wall Street.
“We have yellow warning flags,” Emanuel said.
He is particularly worried about the Core PCE, a key indicator closely watched by the Federal Reserve, which rose at a rate of 3.1% faster than expected in April compared to the previous year.
“Anytime that number exceeds 2%, the average monthly return for those periods is -1.6%. [for the S&P 500]”he said.” You associate that with the fact that we had the lowest bearish reading in the [AAII] sentiment survey last week, unheard of since early 2018, just before the Armageddon episode, [and] we believe there is a recipe for a pullback from the long term uptrend just ahead of us. “
Given that Emanuel believes the bull market will be intact until at least the middle of next year, he does not plan to retreat.
“We would look to add weakness to our core overweight positions in energy and financials,” he added. “For now, we prefer more defensive cyclicals such as consumer staples, health care and indeed REITs.”
Emanuel said he believes there is a chance the S&P 500 will drop to 3,770 this summer, matching the 200-day moving average. But he expects the index to climb back to its lowest point and maintain a target of 4,000 at the end of the year.
On Monday, the S&P 500 closed at 4,226.52, up nearly 13% year-to-date.