These stock watchers nailed the market’s melt-up, but now they’re bracing for a fall. Here’s what to watch.

On Friday, the Dow Jones Industrial Average
DJIA,
-0.13%
notched a 10th consecutive positive close, marking the longest win streak for the blue-chip benchmark since Aug. 7, 2017, according to the team at Dow Jones Market Data.

To say that it has been a remarkable run-up is, perhaps, an understatement for some assets. Carvana
CVNA,
-2.38%,
a left-for-dead used-car retailer, whose stock had surged by 1,100% at its peak so far this year, before retreating somewhat, is a perfect example of the fervor surrounding risky assets.

It feels as if buyers are crazed, even as the Federal Reserve is set next week to raise interest rates a quarter of a percentage point, marking the 11th time (since March of 2022) that the central bank has increased benchmark interest rates after pausing in June to assess the inflation backdrop.

Read: U.S. inflation slows again, CPI shows

The Wall Street Journal this week described the investing environment as hitting a “fever pitch” with “risk-on” assets the most popular they have been since late 2021—right before stocks entered the longest bear market in decades.”

The surprising velocity at which the bearish miasma from earlier this year has dissipated is also noteworthy, considering the concerns around stubbornly high inflation and incessant fear of a Fed-induced recession.

At Friday’s close of trade, the Dow was off a mere 4.3% from its January record high reached in 2022, the S&P 500 is about 5.4% shy of its Jan. 2, 2022 closing high. Soberingly, the tech-weighted Nasdaq Composite Index
COMP,
-0.22%
remains off nearly 13%.

Now, however, may be time to take profits, some pros seem to caution.

Stifel’s chief equity strategist Barry Bannister told MarketWatch via email that the lagged effects of the Fed’s barrage of tightening, combined with stingy lending — among other factors — would likely be triggers for a market pullback, if not an economic retrenchment.

 “In total, those leading indicators will keep economic growth soft,” Bannister said, also referencing flagging manufacturing.

In large part, that is why he’s calling for sideways action or a possible retreat of about 3% for the S&P 500
SPX,
+0.03%
to 4,400.

Bannister’s recent call is worth heeding because he nailed the first part of a two-pronged prediction for 2023, when he referred to it as a year of two halves.

Back in January, he wrote:

2023 may be a year of 2 halves, with the S&P 500 peaking mid-2023. The S&P 500 in late 2023 may give back some or all of 2023 gains.

The Stifel analyst sees a heightened recession risk for 2024.

Meanwhile, Michael Gayed, who also runs the Lead-Lag Report and is a portfolio manager at Tidal Financial Group, warned of the perils of investors’ rabid buying, in a recent report. Similar to Bannister, he also predicted a strong first half of 2023 followed by a retreat in latter part of the year.

Jacques Cesar, a former managing partner at Oliver Wyman who now works on market valuation for the firm, shared a similar sentiment to those two…but with some nuances, in an interview with MarketWatch.

“Right now, we are in a melt-up,” he said. “And Rule No. 1 about a melt-up, don’t short a melt-up,” he said, referring to making bearish bets that the market will fall soon.

“Is the market too high? Yes,” Cesar said. “But is there a signal to short? Absolutely not,” he said.

The market valuation pro, says investors find themselves in a Russian nesting doll of market conditions: “We are in a sub-cyclical bull in a cyclical bear in a suprasecular bull.”

His assumption is that the current melt-up in markets will reverse but cautions that predicting the precise timing is impossible.

Useful signs to look for will be decelerating market pricing and then reversing coupled with trading volume picking up as stocks slide.

Cesar also predicts a pullback in 2024, if not a recession, and said that downturn will be followed by a return to a suprasecular, long-term bull run in 2025.

Although, there won’t be an apparent trigger for the market and economic slump, Cesar says eroding consumer savings. built up during the pandemic, will be depleted by the end of 2023.

As for inflation, Cesar says it has been dropping like a stone and pointed to the New York Fed’s Underlying Inflation Gauge as an early (but perhaps unheeded) signal that pricing pressures have been steadily receding.

So much so that disinflation, a slowdown in the rate of inflation, may be a corporate concern in coming quarters.

He said companies, which enjoyed healthy pricing power during the inflationary period, will be hurt in the short-term by disinflation in the short term.

“As you go into disinflation, the margins get squeezed,” he said.

Bannister says oversold parts of the market like banks
KRE,
-1.26%

KBE,
-1.20%,
industrials
XLI,
-0.47%
and basic materials
XLB,
+0.01%,
might be better opportunities for investors in the third quarter than growth-oriented tech plays like Tesla
TSLA,
-1.10%,
for example.

In the end, bulls (and bears), similar to moviegoers are wading back into a market that had been written off at the start of the year. The major cinematic question? Will they will be partying with Barbie or getting blown up with Oppenheimer?