Author: Zhao Ying, Wall Street Insights
The current "atmosphere is perfect" for US stocks, but historical records are not optimistic.
BTIG's Chief Technical Market Strategist issued a warning in the latest report, stating that the market is entering the most dangerous seasonal window of the year—August to October in a midterm election year—at all-time highs and with extremely low volatility. He bluntly stated that now is a highly attractive opportunity for investors to actively reduce risk exposure or hedge broad equity positions.
The equal-weighted S&P 500 Index (SPW) has gained about 16% year-to-date, with all sectors recording positive returns, indicating that "breadth expansion" has already been achieved. However, historical data shows that since 1990, the S&P index has experienced a correction of at least 7% every year during the period from August 18 to October 11 in midterm election years, with the exception of 2006. Entering this period at historical highs, with the VIX at yearly lows, and protective demand almost non-existent, multiple technical signals are simultaneously flashing warnings.
Seasonal Pattern: The "Cursed Window" of Midterm Election Years
BTIG's data shows that since 1990, the SPW has typically peaked around August 18 in midterm election years, subsequently entering a rather difficult downtrend until mid-October.
In 1990, 1998, 2002, 2010, 2014, 2018, and 2022, there were corrections of at least 7% between August and October. The decline in 1994 was 5%, but it further expanded to 8% by December of that year. The only exception was 2006, but that year had already recorded a 9% decline from May to July, essentially shifting the adjustment period earlier.
Notably, midterm elections themselves are not always the direct cause of volatility. BTIG points out that it is often an unforeseen external event that triggers the decline—such as the invasion of Kuwait in 1990, the Long-Term Capital Management (LTCM) crisis in 1998, and the Ebola outbreak in 2014. This suggests that the potential risks facing the current market are equally difficult to predict.
Technical Picture: Multiple Indicators Simultaneously Flash Yellow Lights
In addition to seasonal patterns, several current technical indicators point to rising market fragility.
Since the March correction, the maximum drawdown of the Invesco S&P 500 Equal Weight ETF (RSP) has not exceeded 2.25%. This unusual calm itself is a signal of risk accumulation. Meanwhile, the RSP is currently trading about 11% above its 200-day moving average. BTIG notes that, excluding the post-COVID special market conditions, the deviation of RSP from its 200-day moving average typically does not exceed the current level. While the trend is strong, the extent of the stretch is already within the high end of the historical range.
The absence of downside volume signals is also noteworthy. So far this year, the NYSE has not recorded a single "80% Downside Volume Day"—a trading day where downside volume accounts for over 80% of total volume. The historical average is 21 such days per year, and since records began in 1996, no year has had fewer than 5. BTIG states that the current period represents the longest consecutive record without an 80% Downside Volume Day, and the gap is significant.
Sentiment: Market Demand for Protection Falls to Extremely Low Levels
Investor disregard for downside risk is also reflected in the options market. The 10-day moving average of the CBOE equity put/call ratio has fallen to 0.82, sitting at the low end of the range over the past several years, showing that market participants have hardly purchased any protection against potential corrections.
BTIG lists this phenomenon alongside the market being at historical highs and the VIX at yearly lows, suggesting these three factors together paint a complete picture of high market complacency.
Long-End Rate Movement: Bond Market Sends Divergent Signal
On the macro front, a concerning divergence has also emerged. Despite last week's Non-Farm Payrolls, CPI, PPI, and retail sales data all displaying dovish characteristics, US long-term Treasury yields closed near the highest levels of this cycle.
This movement, where "rates ignore favorable data," presents a clear contradiction to the current optimistic pricing in the equity market, adding further uncertainty.
Regarding sector allocation, BTIG points out that historical data shows the healthcare sector has performed relatively resiliently during the August to October period of midterm election years, potentially offering some defensive value.
In semiconductors, the Philadelphia Semiconductor ETF (SOXX) encountered precise resistance at its 50-day moving average. BTIG believes this aligns with the initial rebound pattern following a "blow-off top," expecting the ETF to still seek its 200-day moving average bottom within the year. While the energy sector shows a multi-month breakout, BTIG is cautious about chasing the rally, believing a single headline could reverse the uptrend and does not recommend actively buying high.
BTIG strategist Krinsky concludes that the current moment is an excellent time to reduce risk or hedge broad equity exposure, as "the clock is ticking."
