Stocks have gone too far, too fast and may need to take a rest, Wall Street market analysts say

After pushing to record highs, stocks have moved too far, too fast and could pull back before they move much further ahead.

Stocks closed mixed Tuesday, with the Dow up 0.1% at a record 27,492, but the S&P 500 down 0.1% at 3,074 in a rest from its recent break to record highs. Nasdaq was at a record 8,434, up fractionally. Futures were little changed on Wednesday.

“The S&P could easily pull back to 3,045 to 3,055. If this rally is going to stay intact, it shouldn’t go much lower than that. We might need to retest 3,050ish before we reach higher highs,” said Scott Redler, partner with T3Live.com, who watches short-term technicals.

Lori Calvasina, chief equity strategist at RBC, said she would not be surprised to see a somewhat bigger sell-off, just based on how much stocks have run from the late 2018 low without a major correction.

Stocks bottomed on Dec. 26, 2018 in a crushing sell-off that took the S&P 500 to 2,346. Now, at Tuesday’s close of 3,074, the S&P is up 30.77% since that low and is sitting about 3 points from its record high, set Monday. Year-to-date, the S&P is up 22.6%.

“We’re not at the 12-month mark yet, and we feel the market got ahead of itself a little in the short-term,” said Calvasina. Her year-end target for the S&P is 2,950. “I would say there are some people out there with much lower forecasts than ours. We don’t consider ourselves to be bearish. We consider ourselves to be neutral.”

According to a CNBC survey, the median target of Wall Street analysts is 3,000 for the S&P 500 at year end..

“We do think there’s an opportunity for a pullback here. We had three this year in the 4% to 7% range. It would be in-line to get another mild pullback,” said Calvasina.

Calvasina explained that following the last three major corrections in 2010, 2011 and 2016, the market gained an average 29.7% before selling off.

The S&P is now outpacing that average gains and is up 30.77% since hitting bottom last December. For the year-to-date, the S&P is up 22.6%.

“It feels like there’s a fear of missing out…We felt the same thing back in July,” Calvasina said. Stocks sold off in August, after reaching new highs in July.

The small cap Russell 2000 is still about 8% from its record high, and it ended Tuesday up 0.1% at 1,599, just below the psychological 1,600 level.

“Small caps have moved, but it hasn’t been a clean breakout,” she said. “They’re trying to take over leadership but they haven’t done it in a sustained way.” She said small caps still have to prove themselves.

“It seems that part of the market is better than the rest of it,” she said adding she looks at positioning and other data. Based on valuation, they are very cheap, she said.

Many strategists expect the market to gain into year end, riding the positives of a potential trade agreement between the U.S. and China. The favored leaders of the rally are cyclical stocks, like industrials, financials, tech, and energy, which has been a laggard.

Paul Hickey, co-founder of Bespoke, said he sees signs the market is overbought, but he still sees it moving higher into the year-end.

“We’re at pretty overextended levels both here and abroad. You can either have a short term pullback in price or also time can cause those overbought levels to subside,” said Hickey. “From a slightly longer-term basis, say through the end of the year, we think we’ll be higher at the end of the year than we are now. There’s a lot of factors at play there.”

Hickey said another factor is seasonal forces, and stocks usually do well at this time of year. Historically, November and December make up the best two-month period of the year. Hickey said when the market is up 20% or more for the year so far, the final two months tend to be better, gaining on average 5%.

“You tend to see strong finishes for strong years,” he said.

Hickey also said the S&P 500 reached its recent new high, after three months from the previous high. When he studied similar occurrences, there was a positive outcome.

“When we looked back, historically the average gain was 11% over the next year, which is about 3% above the historical average for all years,” he said. “We are overbought short term. I wouldn’t necessarily take those overbought levels as a reason to sell. You have a better entry point in the next few days.”

Redler said the market needs a rest. “We had a very big move. We were just 100 handles lower just two weeks ago,” he said. “This will be a time to let the indices digest and see what kind of stocks perk up and show relative strength.”

He said it’s better if the market doesn’t go up too quickly. “It’s better when it stair steps and more traders can participate,” he said.