Bearish trend signals stocks are vulnerable to a 10% to 15% correction

The market appears to be doing something that happens ahead of corrections.

When the S&P 500, Nasdaq and the CBOE Volatility Index rise together, BTIG’s Julian Emanuel warns it’s often a precursor to a 10% to 15% pullback.

“Whenever we’ve seen that going back to the beginning of 2018, we were essentially weeks away from a correction,” the firm’s chief equity and derivatives strategist told CNBC’s “Trading Nation” on Monday. “The most recent one being last September. We think history could in fact repeat itself.”

According to Emanuel, the bearish trend has been happening for a couple of months.

“You could trade back to 4,000 [on the S&P 500],” he said. On Monday, the index fell 0.18% and closed at 4,387.16. The S&P 500 is up about 17% so far this year.

Emanuel suggests rising Covid-19 delta variant fears during a seasonally difficult period for stocks creates a more precarious situation.

“Four or five weeks ago, we really weren’t terribly concerned about the delta variant,” he said. “It’s entirely possible that the [economic] growth we expected might come a little bit slower.”

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Yet Emanuel, a long-term bull, regards near-term trouble as healthy because it would give the market a key refresh.

“Its leadership which has been a bit too concentrated,” said Emanuel.

His concerns apply mainly to a handful of large cap growth and Big Tech stocks.

“At these valuations and as much as these stocks have run, they are in fact vulnerable in our view, particularly given the potential for China, as a wildcard going forward,” added Emanuel.

‘China looks very interesting as a contrarian play’

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