Strategists at Deutsche Bank suggest that the pair could be on the cusp of another pullback, following a previous successful prediction earlier in April when they predicted a pause in the market rally.
Their predictions proved accurate as the S&P 500 saw a 4.6% decline in the two weeks following the April 5 note.
Strategists have identified three main factors that indicate a potential pause in the market's upward trajectory.
First, they observed a sharp increase in equity positions among both rules-based and discretionary funds, with exposure reaching the 95th percentile of historical readings over the past decade.
Moreover, equity funds recorded nine consecutive weeks of flows, indicating an “extended” risk appetite in the market.
Another contributing factor is the approaching buyback blackout period, which precedes the announcement of second-quarter earnings.
The Deutsche Bank team estimates that companies representing nearly half of the S&P 500's market capitalization will enter blackouts by the end of next week.
During these periods, companies are prohibited from buying back their own shares, which may reduce demand for the shares and contribute to market stagnation.
With large inflows into stocks and high exposure to funds, coupled with the upcoming blackout period, the market may already be in need of a pause, strategists at Deutsche Bank concluded.
