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5 charts signaling a stock market correction in the first quarter of 2025. Plus, when to take profits.

Laila Maidan Dec 17, 2024, 11:19 PM GMT+5:45

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Getty Images; Jenny Chang-Rodriguez/BI

The stock market is closing the year with the Santa Claus rally.

Helene Meisler predicts a market correction in early 2025 due to bullish sentiment.

Indicators like the McClellan Summation Index show a slowdown despite current optimism.

Market rallies have been the theme for 2024. And the year is not over yet.

As we enter the final quarter, we're on schedule to wrap it up with the highly anticipated Santa Claus rally, a historically observed rise in stock prices that usually takes effect around December 25 and lasts for about a week.

This year, that short rally may be an opportunity to take some profits, according to a four-decade Wall Street veteran and chart master Helene Meisler, who says all roads are leading to a correction in the first quarter of 2025.

She points to two key methods that help her gauge where the market may be headed. One is sentiment, and when it's overly bullish, it could indicate a coming reversal. The other is stock market signals that are already flashing a slowdown.

For Meisler, insight for the former can be found in the Investor's Intelligence Bulls and Bears indicator, which pulls newsletter writers' insights based on weekly polls that show attitudes toward the market. As of Sunday, the indicator showed 63% of respondents are bullish.

"Sentiment is a little out of control on the upside; almost every single sentiment indicator I have is showing so many bulls," Meisler said.

The chart below shows the ratio between bulls to bears sits at 3.9. Anything above 3 means extreme optimism and potentially an overbought market. Historically, readings over 4 tend to signal areas where the market begins to reverse, entering a correction, she noted.