It’s time to take profits, says strategist with top S&P 500 target for next year

Proceed cautiously, warns our call of the day from Yardeni Research’s chief investment strategist, Ed Yardeni, who earlier this month predicted the S&P 500
SPX
could reach 6,000 in two years.

“Is everybody (too) happy?” Yardeni asks in an update to clients on Thursday. “Most pundits concluded that the market was overbought and due for a correction. We agree, which is why we haven’t raised our longstanding year-end target of 4,600.”

The strategist said one possible trigger for the selloff was a sign that the Israel-Gaza war is turning more regional, after the U.S. announced a security operation in the Red Sea involving the U.K., Canada, France, Spain and other nations, to protect ships from a wave of Houthi attacks.

“That’s a good excuse for some profit-taking, which makes sense to us given the rising risks in the Middle East. In any event, bullishness has gotten a bit excessive of late,” he said.

Yardeni ticked off some reasons. He first points to the bullish surveys from both Investors Intelligence Bull/Bear Ratio (BBR) and the American Association of Individual Investors (AAII) in the past week. Bears made up just 18.1% of the BBR and 19.3% of the AAII, he notes.

He also looks at the CBOE equity put-call ratio that fell to 0.61 on Wednesday. A drop in that can hint of a market that is heating up too fast and a potential correction looming. Put options are the right, but not the obligation to sell an asset at a specified date. Call options work the opposite way.

Some also blamed Wednesday’s selloff on massive volumes for put options that expire within 24 hours (0DTEs) — an increasingly popular but risky derivatives.

Read: Options traders are chasing the stock-market rally with the S&P 500 near record highs

Yardeni also highlights the fact crude prices have failed to get a bullish boost from mounting tensions in the Middle East. “One reason is that the global economy is weak because of recessions in China and Europe. Another is that U.S. crude oil field production rose to a new record high of 13.3 million barrels a day during the Dec. 15 week,” he said.

He notes more Americans are working from home or doing fewer commutes post pandemic, which has cut into gasoline consumption. But he said Brent
BRN00,
+0.05%
is up 8.8% since Dec. 12, and Yardeni said he’ll be watching that for a sign the Israel-Gaza war could potentially disrupt the global economy. Indeed some analysts are flagging inflation worries surrounding those attacks.

“That’s not hard to imagine given that in 2021, a ship stuck for a week in the Suez Canal snarled global trade for months. The Houthi attacks and rising insurance shipping costs are forcing vessels hauling everything from oil to grains to autos to sail around Africa. The extra costs and delays pose risks to the global economy, just as inflation looked set to be cooling. Stay tuned,” said Yardeni.

For 2024, Yardeni has said that the S&P 500 could reach 5,400 — higher than any other strategist, with the next highest target on Wall Street at 5,200.

The markets

Stock futures
ES00,
-0.15%

YM00,
-0.12%

NQ00,
-0.12%
are indicating a higher start, with Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
slipping and the dollar
DXY
softer. Oil prices
CL.1,
-0.45%
are declining and Angola said it’s leaving OPEC.

The buzz

The last economic reports saw initial jobless claims rising to 205,000, U.S. GDP for the third quarter revised to 4.9% growth, as the Philadelphia Fed manufacturing index went further into negative territory, falling to -10.5 — its 17th negative reading in 19 months. The leading economic index is due out at 10 a.m. Eastern.

Micron Technology
MU,
-0.63%
stock is up after the data-storage chipmaker posted forecast-beating quarterly results.

Opinion: Micron is becoming another AI play for investors

Toyota’s
TM,
+1.25%
small car unit Daihatsu was raided after faked tests were discovered.

CarMax shares
KMX,
-1.41%
rose after the used-car retailer reported fiscal third-quarter profit that beat expectations.

BlackBerry’s stock
BB,
-0.56%
fell as the security-software maker forecast fourth-quarter sales that were below Wall Street’s expectations.

The Pentagon said that the U.S. and other nations including the U.K., France, Spain and Norway will create safe zone for ships transiting Red Sea following attacks by Houthis, who have vowed to step up those assaults.

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The chart

JPMorgan’s most recent client survey shows 2024 optimism for the S&P 500 is riding high, even if the bank itself has one of the lowest targets on Wall Street at 4,200.

Of course, note another chart that shows most clients are feeling pretty wary about stocks in the near term:

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