U.S. stocks could fall in March thanks to waning momentum, ‘seasonal’ weakness: analyst

See: Nvidia’s earnings report could kill the momentum driving U.S. stocks higher, regardless of how it turns out.

U.S. stocks have been on a volatile run since the start of the year, as investors have veered between continued caution toward the Federal Reserve’s monetary-policy path and growing optimism around artificial-intelligence applications and strong corporate earnings. 

All three benchmark U.S. stock indexes have still booked strong year-to-date returns, with megacap technology stocks, including the so-called Magnificent Seven, boosting Wall Street to multiple record closing highs over the past two months. The S&P 500
SPX
has advanced 4.3% so far in 2024, while the Nasdaq Composite
COMP
and the Dow Jones Industrial Average
DJIA
have gained 4.1% and 2.3%, respectively, over the same period, according to FactSet data.

See: 3 ways a ‘Magnificent Seven’ stock-market bubble could burst

However, Krinsky expressed concern that, beneath the surface, there is more downside risk facing Wall Street as seasonal weakness could weigh on the stock market next month (as detailed in the chart below).

“Many dismiss the seasonal patterns, but over the last year it has been uncanny,” Krinsky wrote. “From the mid-March ’23 banking crisis low, to the July peak, to the late-October low, and then here we are at a mid-February peak. Obviously [it’s] just one piece of the puzzle, but given the negative momentum divergences, some weakness into March should not be surprising.” 

Meanwhile, Krinsky thinks small-cap stocks will begin to show leadership, as he’s seen a “subtle shift” in the correlation between the Nasdaq-100
NDX
and the Russell 2000
RUT
over the past few weeks. 

For much of the last year, the Invesco QQQ Trust ETF
QQQ,
which tracks Nasdaq-100 companies, has tended to outperform the iShares Russell 2000 ETF
IWM
when interest rates moved higher. But that relationship has subtly reversed over the last two weeks, Krinsky said, adding that it’s “an encouraging sign” for small caps that they can outperform in a higher-rate environment.

Small-cap stocks continued their volatile stretch on Tuesday, with the Russell 2000 down 1.4% and notched its eighth straight session with a move of at least 1% in either direction — its longest such streak since a 10-session run that ended in March last year, according to Dow Jones Market Data.

See: Small-cap stocks haven’t been this volatile in nearly a year. What it means for the long-suffering segment.

The three major large-cap indexes tumbled on Tuesday, with investors looking ahead to the release of minutes from the Fed’s latest policy meeting as well as earnings from Nvidia
NVDA,
+0.35%,
both due out on Wednesday afternoon. The S&P 500 was off 0.6%, while Dow industrials were down 0.2% and the Nasdaq Composite slid 0.9%, according to FactSet data.