Wall Street is flashing a growing number of sell signals, according to Longview Economics.
While the S&P 500 is still just 1.5% off its August 14 record high, recent weakness in tech stocks has raised doubts about the market’s momentum. Chris Watling, Longview’s CEO and chief strategist, warns that investors should be cautious as the market heads into September, historically one of the toughest months for equities.
“You get warning shots before you get meaningful pullbacks,” Watling told MarketWatch, pointing to several red flags:
- Thin volumes — trading activity is unusually low, suggesting investors are already fully invested, a condition often seen before major declines.
- Valuation excess — over 20% of stocks trade above 10x enterprise value-to-sales, levels last seen at the 2000 and 2021 peaks. Palantir’s rally, he says, is a prime example of frothy “crowded trades.”
- Speculative options activity — single-stock call option volumes just hit a five-year high, signaling heavy retail speculation and the revival of meme-stock behavior.
- Rising leverage — margin debt is increasing, while corporate bond spreads remain extremely tight, implying complacency toward risk.
- Volatility warnings — the steep VIX curve and Longview’s valuation-to-volatility model are both flashing sell signals.
His models also show equities overbought relative to bonds, sector divergences building, and market liquidity set to tighten further as Treasury issuance increasingly drains capital with the Fed’s reverse repo facility nearly depleted.
Despite the warnings, Watling isn’t calling for investors to short stocks. He says a bear market is unlikely while the Fed holds steady, and aggressive rate cuts would likely fuel another rally, at least temporarily.
For now, he remains “tactically neutral” on U.S. equities, with a preference for healthcare and staples. If the Fed cuts more aggressively, he would turn toward cyclical sectors.