Stock market outlook: Prepare for correction after sell signals flash

• A stock market correction is likely in the coming weeks, says Fairlead Strategies’ Katie Stockton.
• Technical indicators suggest a near 10% decline for the S&P 500.
• Investors should use relief rallies to hedge and only hold stocks that are trading above key support levels, Stockton said.

A stock market correction looms in the early days of 2025, a note from Fairlead Strategies said this week.

The tech-focused research firm led by Katie Stockton said in a note Wednesday that a continued selloff in the S&P 500 is likely over the next few weeks.

The index flashed fresh medium-term “sell” signals confirmed last week, creating a setup that “supports a correction in the coming weeks,” Stockton said.

Technical sell signals noted by Stockton include MACD and daily stochastics, two momentum-based indicators, as well as a signal known as the DeMARK Indicator.

The end of the seven-day Santa Claus trading window on Friday also strengthens the case for a continued decline. The final trading days of the year and the first two sessions of the new year historically see strong gains for stocks.

The note said monitored longer-term indicators point to a correction in the first quarter, which should then give way to a sideways trading range “of several months’ duration.”

“SPX is showing signs of long-term upside exhaustion according to the DeMARK indicators after approaching a long-term measured move target of 6120. Similar long-term ‘sell’ signals preceded corrective environments in 2018 and 2022,” Stockton said.

The alignment of medium- and long-term “sell” indicators that are flashing means “a correction could be significant,” Stockton said.

Potential support levels to watch include the S&P 500’s 200-day moving average at around 5,555, which would represent a potential downside of 6% from current levels, followed by a drop to around 5,337, which would represent a 9% decline.

The S&P 500 is down 4% from the all-time high reached in early December.

To prepare for a potential correction, Stockton advises investors to use any relief rally in stocks as an opportunity to “roll out top-down hedges” and only hold stock positions that are in strong uptrends and trade above support levels defined by a rising 20 -day moving average.

“However, consider using stop-losses as they are likely to be affected by a broad sell-off,” Stockton said.