MW Take heed of the latest market wobble. 'You get warning shots before meaningful pullbacks,' says this strategist.

By Jamie Chisholm

A number of Wall Street signals are flashing sell, according to Longview Economics

The signs coming from Wall Street suggest investors should be cautious

For all the angst over sliding popular tech stocks this week, the S&P 500 SPX closed the previous session just 1.5% below its record high from August 14.

It's easy, therefore, to shrug off the latest wobble as just the meanderings of a market still in an uptrend.

But Chris Watling, the CEO, global economist and chief market strategist at Longview Economics, is wary about the signals U.S. equities are giving going into the traditionally dodgy September period.

"You get warning shots before you get meaningful pullbacks," says Watling in a phone conversation on Thursday with MarketWatch, after he published a note detailing the red flags on Wall Street that are keeping him cautious.

One area of concern for Watling is that trading volumes are down, beyond what would normally be the case for seasonal torpor. That's likely because investors are already largely fully invested, and historically this occurs just prior to major pullbacks.

Next, he says signs of froth have continued to build in recent weeks. For example, the percentage of stocks with valuations greater than 10 times enterprise value to sales- a metric of assessing a company's worth - is over 20%, similar to peaks in 2000 and 2021. Watling points to Palantir's (PLTR) share surge this year as a "demonstration of overcrowded sexy stocks."

In addition, he notes that the volume of outstanding single stock call options reached a major high last week - at a level equivalent to the peaks of the past five years.

"That high reading is indicative of a high level of retail speculation in the equity market (and consistent with reports of 'the return of meme stocks). Spikes to high levels often occur just prior to pullbacks," he says.

Meanwhile, signs of heightened risk-taking and complacency abound. Margin debt is picking up, says Watling, and separately, corporate bond spreads "are about as tight as they ever get (i.e. the risk premium issmall)."

Also, the current steep volatility curve, where the near-term Cboe Volatility Index VIX measure is notably lower than its longer-term futures, often takes place just before the market rolls over, according to Watling. "Our valuation model, which looks at the S&P 500's forward PE [share price to earnings] ratio relative to the VIX, is on SELL," he writes.

Indeed, both of Longview's sector and single-stock correlation models are also signaling sell. "That implies that there's widespread (directional) divergence between stocks and sectors, and a narrowness to the advance in the market. This often occurs ahead of a pullback in the headline index," says Watling.

Another Longview market timing model shows equities are overbought relative to bonds, again triggering a sell recommendation.

Finally, there's the U.S. market liquidity backdrop. Watling notes that the Treasury's debt sales of late have been supported by running down the Fed's reverse repo facility, which is now almost empty. "As such, the debt issuance is likely to be more of a drain on traditional market liquidity (thereby reducing the amount of liquidity available for equity markets)," he says.

Amid all this caution, it should be noted that Watling is not suggesting investors go short stocks. He says he would only recommend that once a bear market is clearly underway, and with the Fed on an easing cycle, that's unlikely to be the case now.

Indeed, he says that if the Fed were to take a more Trumpian turn and cut interest rates aggressively, then stocks would rally strongly - in the short term, at least.

Nevertheless, given all the flashing signals noted, he remains what he calls "tactically neutral" on U.S. stocks. Pushed for which sectors he would favor given his caution, Watling plumps for healthcare and staples. If the Fed cuts more aggressively, he would favor cyclicals.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y nudge up. The dollar index DXY is rising, while oil prices (CL.1) slip and gold futures (GC00) are trading around $3,370 an ounce.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              6370.17    -1.52%  0.11%   8.31%    14.35% 
   Nasdaq Composite                                                     21,100.31  -2.81%  0.20%   9.27%    19.76% 
   10-year Treasury                                                     4.341      2.00    -5.10   -23.50   53.70 
   Gold                                                                 3370.5     -0.33%  0.96%   27.70%   32.24% 
   Oil                                                                  63.49      0.55%   -2.43%  -11.66%  -15.30% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Federal Reserve Chair Jerome Powell is due to make an eagerly awaited speech at the Jackson Hole symposium at 10:00 a.m. Eastern.

Nvidia shares (NVDA) are lower following reports the AI chipmaker has ordered some component providers for its H20 chips designed for China to halt production.

Elon Musk tried to enlist Mark Zuckerberg in $100 billion bid for OpenAI, according to a report by the Financial Times.

Zoom Communications shares (ZM) are jumping after the communication software group's earnings topped forecasts.

Intuit stock $(INTU)$ is lower after the tax software company's earnings beat estimates but it forecast slower sales growth in coming quarters.

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The chart

Michael Kramer at Mott Capital Management thinks Fed Chair Powell should not be hinting that a rate cut is coming in September. Kramer presents the chart above, showing the annual producer price index change in green and consumer price index change in red. The blue line is the Philly Fed Prices Paid Index, which has risen to 66.8, the highest since July 2022, when CPI was running at 9% and PPI at 11.2%, he notes. "This doesn't mean inflation is heading back to those levels, but it does suggest the rate of change in inflation is accelerating, and quickly."

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   NIO     NIO 
   PLTR    Palantir Technologies 
   GME     GameStop 
   OPEN    Opendoor Technologies 
   AAPL    Apple 
   AMD     Advanced Micro Devices 
   TSM     Taiwan Semiconductor Manufacturing 
   AMZN    Amazon.com 

Random reads

Toothpaste made with hair.

Butter sculpture.

The British love a nice queue. But NOT in the pub!

-Jamie Chisholm

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August 22, 2025 06:32 ET (10:32 GMT)

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