Bank of America suddenly warns: S&P 500 could drop nearly 8%, "three-wave correction" incoming?

Bank of America expects the S&P 500 index may experience a "three-wave correction," with the adjustment possibly lasting until October; the bank also released strategies worth watching in the third quarter, with seasonal patterns pointing to long Nasdaq 100, the US dollar, and US Treasuries (betting on lower yields), while shorting commodities.
Paul Ciana, head of technical research at Bank of America Corp., expressed a relatively cautious view on the S&P 500's subsequent trajectory in his latest research report.

He pointed out that since the March cyclical low, the index has accumulated a gain of nearly 17%, but after hitting a recent high on June 2, upward momentum has clearly weakened, and price performance has shown signs of fatigue.

Ciana explicitly stated in the report that the market may enter an adjustment phase in the coming months. He expects the S&P 500 could pull back to around 6850 points, a level roughly 7.6% lower than the current price. He wrote: "The summer roadmap is a three-wave correction."

He further explained that the market structure after the recent rally has become "overextended," while momentum indicators continue to weaken. In his view, the rebound driven by the US-Iran ceasefire news is becoming more volatile, and correction risks continue to accumulate, so he advises investors to adopt a more defensive strategy from July to September.

Regarding key levels, Ciana gave more specific technical references in the report. He believes the S&P 500 is currently facing selling pressure, and if it subsequently pushes to a new high of 7741 points, it could constitute a "false breakout." Downside support levels are at 7200, 7025, and 6850 points.

On the time dimension, he also highlighted longer-term risk paths: "Summer has just begun, and a more persistent double-correction pattern lasting until October remains a key risk."

This relatively cautious view contrasts with the recent optimistic expectations of some institutions on Wall Street. Just last week, the strategy team at Société Générale raised their year-end S&P 500 target from 7300 to 8000 points, citing a stronger corporate earnings cycle. Additionally, JPMorgan and Fundstrat maintain a bullish outlook for the remainder of the year.

However, this is not the first time Bank of America has issued risk warnings. A strategy team including Savita Subramanian warned earlier in June that the market already has "too many red flags" and advised investors to "take profits."

Bank of America releases third-quarter trading strategies

At a broader asset allocation level, Bank of America also provided cross-market trading clues based on seasonal patterns.

In a research report last Sunday, Ciana wrote that the market could potentially repeat the trend seen in the third quarter of 2018. The report examined top seasonal trading strategies across three time dimensions: the third quarter, July, and the second year of the US presidential cycle. If this plays out, historical patterns suggest that going long on the Nasdaq 100, the US dollar, and US Treasuries (betting on lower yields) while shorting commodities would constitute a phased dominant trading portfolio.

The report noted that the Nasdaq 100 has risen every third quarter since 2018. July particularly stands out, with historically about 68% probability of gains and an average gain of 1.72%; however, the bank warned that September is typically weak.

Beyond major assets, Bank of America also identified other trading directions with seasonal advantages. For example, the US dollar tends to strengthen against the Brazilian real and the South African rand in the third quarter. Historical data shows these two currency pairs rise about two-thirds of the time, with average gains of 4.73% and 2.74%, respectively.

In the interest rate market, the report noted that overseas government bond yields typically trend downward in the third quarter, especially during July and August. Specifically, German bond yields decline about 64% of the time in that quarter, while Australia's 10-year bond yields fall about 65% of the time. From a broader global perspective, yields are generally weak for most of the third quarter, with signs of a rebound in September.

Within the overall bearish framework for commodities, individual commodities may still show independent trends. Among them, copper is listed by Bank of America as a commodity with seasonal opportunities. The bank pointed out that copper prices on the COMEX have about a 65% probability of rising in July, with an average gain of 1.84%.