BTIG Warns: Rising Risk of Systematic Pullback in U.S. Stocks from August to October

U.S. stocks are at high levels, volatility is extremely low, and investor complacency is rampant—BTIG's chief technical strategist sounds the alarm at this moment.

Written by: Zhao Ying, Wall Street Insights

The current atmosphere in U.S. stocks is "perfect," but historical records are not optimistic.

BTIG's chief technical market strategist has issued a warning in a recent report that the market is entering the most dangerous seasonal window of the year—from August to October in a midterm election year—at all-time highs and with extremely low volatility. He bluntly stated that this is a highly attractive moment, and investors should actively reduce risk exposure or hedge broad stock positions.

The equal-weighted S&P 500 Index (SPW) has accumulated a gain of about 16% this year, with all sectors recording positive returns, indicating that market "breadth expansion" has been achieved. However, historical data shows that since 1990, the S&P index has experienced at least a 7% pullback during the period from August 18 to October 11 in midterm election years, except for 2006. The current market enters at historical highs, with the VIX at a yearly low, protective demand nearly absent, and multiple technical signals simultaneously issuing warnings.

Seasonal Patterns: The "Curse Window" of Midterm Election Years

BTIG's data shows that since 1990, SPW has typically peaked around August 18 in midterm election years, followed by a challenging downward phase until mid-October.

In 1990, 1998, 2002, 2010, 2014, 2018, and 2022, there were at least 7% pullbacks during the August to October period. In 1994, the decline 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% drop from May to July, which somewhat merely advanced the adjustment time.

It is worth noting that the midterm elections themselves are not always the direct cause of volatility. BTIG points out that often an unforeseen external event 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 means that the potential risks currently facing the market are equally difficult to predict.

Technical Aspects: Multiple Indicators Flashing Caution

In addition to seasonal patterns, several technical indicators currently point to rising market vulnerability.

Since the pullback in March, the maximum drawdown of the RSP (equal-weighted S&P 500 ETF) has not exceeded 2.25%, and this unusual calm itself is a signal of risk accumulation. Meanwhile, the current price of RSP is about 11% above the 200-day moving average. BTIG notes that, except for the special circumstances following the COVID-19 pandemic, the deviation of RSP from the 200-day moving average usually does not exceed the current level; while the trend is strong, the extent of stretching is already at historical high levels.

The absence of downside volume signals is also concerning. So far this year, the NYSE has not seen a single "80% down volume day"—a trading day where down volume accounts for over 80% of total volume. The historical average is 21 such trading days per year, and since records began in 1996, no year has had fewer than 5. BTIG states that this is now the longest recorded streak without an 80% down volume day, and the gap is significant.

Sentiment: Market Protective Demand at Extremely Low Levels

Investor indifference to downside risk is also reflected in the options market. The 10-day moving average of the CBOE put/call ratio has dropped to 0.82, at a low level for the past few years, indicating that market participants are almost not buying protection against potential pullbacks.

BTIG correlates this phenomenon with the market being at historical highs, the VIX at a yearly low, and believes that these three factors together constitute a complete picture of the current market's heightened complacency.

Long-Term Rate Anomalies: Bond Market Sending Divergence Signals

On a macro level, there are also concerning divergences. Despite the non-farm payroll, CPI, PPI, and retail sales data showing dovish characteristics over the past week, U.S. long-term Treasury yields closed near their highest levels of this cycle.

This "interest rates ignoring positive data" trend presents a clear contradiction to the current optimistic pricing in the stock market, further increasing market uncertainty.

In terms of sector allocation, BTIG points out that historical data shows that the healthcare sector tends to perform relatively well during the August to October period in midterm election years, potentially providing some defensive value.

In the semiconductor sector, the Philadelphia Semiconductor ETF (SOXX) faced precise resistance at the 50-day moving average. BTIG believes this aligns with the initial rebound trend after the "boom/bust top" and expects it to still seek the 200-day moving average this year. Although the energy sector has seen multi-month breakthroughs, BTIG is cautious about chasing gains, believing that a single headline could reverse the upward trend, and does not recommend actively chasing highs.

BTIG strategist Krinksy concludes that now is an excellent time to reduce risk or hedge broad stock exposure, stating, "The clock is ticking."