Let the Correction Begin!

 

Is this the start of a late summer sell-off ?

On Wednesday, the Dow Jones Industrial Average closed above 22,000 again, apparently recovering from a brief decline amid heightened tensions over North Korea’s missile program. If fear of nuclear war couldn’t derail stocks, what could?

Apparently white supremacists and neo-Nazis in Charlottesville, Va.

President Trump’s fevered, contradictory response to the violence in that university town over the proposed removal of a statue of Confederate General Robert E. Lee prompted an exodus of high-profile CEOs from two of the president’s symbolic economic councils and then the collapse of those bodies.

Suddenly Wall Street started worrying that some of the “grown-ups” in the administration, particularly Gary Cohn, director of the National Economic Council and former president of Goldman Sachs, were preparing to bail. Wall Street views Cohn as the linchpin of the administration’s efforts to get tax reform and other goodies for the business community.

The Dow tumbled 274 points on Thursday and was off another 50 points as I wrote this Friday morning.

But there was lots more to this decline than toxic racial politics.

First of all, U.S. stocks have been richly priced for some time—years, by some measures. And the historically low levels of the CBOE Volatility index, the VIX, until the last couple of weeks suggest complacency has been rampant.

Second, August and September are historically weak months for stocks, so the Dow’s early August all-time high was seasonally unsustainable.

Third, volume on that all-time closing high of 22,118.42 was pretty low, while volume on the last two Thursdays’ sell-offs was very strong. That suggests the bears are making some headway. Also, the relief rally from the North Korea sell-off didn’t push either the Dow or S&P 500 to new all-time highs.

Fourth, technicians report that market breadth—the number of stocks hitting new highs compared with the number at new lows—is narrowing, which often happens before corrections.

Fifth, the Dow Jones Transportation Average and the Russell 2000 small-cap index remain well off their peaks. That “non-confirmation” of the Dow’s all-time high is another sign of potential weakness ahead.

Finally, it’s been more than 280 days since stocks had a 5% pullback, one of the longest stretches since World War II.

All these things make the market ripe for a correction. The severe blows to the president’s credibility and leadership in the wake of Charlottesville make us particularly vulnerable for one, as hopes for pro-business tax reform fade and Washington, D.C. faces the daunting fall challenges of passing a new budget, preventing a government shutdown, and extending the debt limit to avoid default.

With those headwinds coming after Labor Day, why wouldn’t traders want to take some profits?

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2 thoughts on “Let the Correction Begin!

  1. So if one had 65% of an IRA in stocks and 35% in bonds how much would that investor park in a money market and for how long or is that timing the market and not a good strategy?

    1. Michael, I do not give individual investment advice. The Golden Egg Investing retirement investing plans for different ages have all my recommendations. Thanks for your interest, HG

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