The strategist says the markets are overbought and a correction is due

The broadening of the stock market’s rally has fueled optimism that a soft landing for the economy is increasingly possible despite aggressive rate increases by the Federal Reserve. This is leading some on Wall Street to believe that stocks will move higher this year.

However, one dealer says he “doesn’t buy it.”

Gareth Soloway, chief market strategist at Inthemoneystocks.comTechnical analysis platform.

“If you subtract the seven stocks of the S&P 500 (^GSPC), apples (^AAPL) of the world, Google (^GOOG), Microsoft (^MSFT), Amazon (^AMZN), etc., the S&P 500 is still only up 4%,” Soloway added. He thinks investors are now chasing stocks they didn’t run away from like mega-stocks.

The Nasdaq Index (^IXIC) had the best first half of the year in four decades, up nearly 34% year-to-date. The S&P 500 is up 18%. Even the Dow Jones Industrial Average (^DJI) touched a 52-week high this week.

The market bulls point to other sectors such as Dow Transports (^DJT) as evidence of the health of the economy and the continuation of the bullish trend in stocks.

However, Soloway says disappointing factory orders, weak industrial production, slower-than-expected retail sales and tougher lending standards from banks all point to a weaker economic environment.

“It’s this dream that everything is going to work out — I just don’t expect it to happen,” Soloway said.

He believes that the markets are overbought and due for a correction.

“I think in general the Nasdaq is probably down about 10% from the runs it’s seen, and I think the S&P — because it’s hedged in financials, which is starting to do better, as well as some other areas — is probably down about 5-6%,” Soloway said.

He notes that these are not significant declines given that this year has continued, but that they are likely to get worse in the event of a full recession.

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“Once we get into next year and things start to get bad and the Fed doesn’t bail out, that’s what worries me about breaking the October lows of last year,” Soloway said, predicting that would happen by 70%.

His thesis runs counter to increasingly bullish expectations. As Yahoo Finance contributor Sam Rowe pointed out recently, strategists across Wall Street have done just that Review up to year-end targets for the S&P 500.

Calls for a soft landing of the economy despite aggressive interest rate increases by the Federal Reserve are becoming more common.

“We’ve maintained our divergent call for a soft landing since early last year,” Morgan Stanley economist Elaine Zentner wrote in a note to investors this week. “The data continued to move in our direction, our view only strengthened, and the soft landing became the consensus.”

Meanwhile, Goldman Sachs recently cut its forecast for the odds of a recession next year to 20% from a previous 25%.

Ennis is a Senior Business Correspondent at Yahoo Finance. Follow her on Twitter at @employee

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