The risk of a market correction increases as resistance levels kick in, says BofA

• The risk of a market correction increases as February approaches, BofA said in a note Monday.
• Investors should take some profits as a number of indices start testing higher price targets, the note said.
• February also represents a historically bearish month for the market, with negative average returns dating back to 1928, BofA said.
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A stock market correction is expected to increase in the coming weeks as several stock indexes begin to test their price targets higher, Bank of America said in a note Monday.

The upward price targets in the S&P 500 derived from the price action seen at the end of 2020 were met when the index rose above 3,850 last week, according to the bank.

And February is one of the weakest months of the year for the stock market, BofA said, citing historical data dating back to 1928. On average, stocks are down 0.11% on average in February. , a median return of only 0.27%, and are only positive 52.7% of the time.

In addition to the low seasonality of the stock markets in February, the current sell-to-call ratio indicates a feeling of complacency among investors, a sign typically seen near market highs, the note said.

The bank also sees the lack of bullish confirmation of the recent stock market rally in the percentage of stocks above their 10 and 50 day moving averages as a worrying signal.

While BofA remains bullish on the S&P 500 for all of 2021, with an end-of-year price target of 4000, a combination of poor seasonality and tactical indicators could mean a sell to S&P support near 3630, which represents a potential 5% drop from Friday is near. Below that level, the S&P should find support near 3550, which represents a potential 7% drop from Friday’s close.

Investors are expected to “take some profits,” BofA said.

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