A delicate situation could develop on Wall Street, reminiscent of the dot-com bubble.
According to BTIG’s Julian Emanuel, it is mimicking the record price movement in the market in late 1999 and could trigger a correction of 10 to 20% within the next month.
“Be aware of the fact that the consequences could be severe if and when it reverses,” the company’s chief equity and derivatives strategist told CNBC’s “Trading Nation” on Monday.
On Monday, the S&P 500 posted its 53rd year-end record high and the tech-heavy Nasdaq posted its 32nd record. Meanwhile, the Dow is only a fraction of one percent off its all-time high.
“We are at a time when the impossible has really become commonplace,” said Emanuel. “If we had said that inflation is at a 30-year high and [10-year Treasury Note] yields would have been 1.3%, whereas the S&P would have been at that level a year ago had no one believed you, me or anyone else. “
Emanuel points out that the record price momentum is so strong that it is overshadowing serious short-term risks related to rising cases of Covid-19 delta variants, higher inflation and the next Federal Reserve policy.
“It could be tempting to keep going,” he said. “This is a time to be in emotional control.”
Emanuel believes euphoria could help push the S&P 500 to 5,000, up more than 10% from Monday’s closing price. However, he warns that the move would make the market more dangerous in the short term.
“What we don’t want is people getting so over-involved in this potentially 5,000 race that they feel uncomfortable and overuse the stock,” he added.
Emanuel’s pullback call, which dates to late spring, is getting louder as he also sees the CBOE volatility index rising along with S&P and Nasdaq.
“That is usually predicted from a pullback. That happened last September,” noted Emanuel. “The other thing that worries us is this collapse in consumer confidence that we have seen.”
Emanuel, a long-term bull, suggests that long-term investors should take a setback in the market.
“Be mentally prepared to buy 10%, 15%, maybe even 20% because the long-term trend is higher and bought pullbacks have been rewarded across the board,” said Emanuel. “We all know that September is a tough month, and that ultimately gives us the opportunity to buy in October.”
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