Long-Awaited Correction Finally Arrives — Here's Why That Isn't All Bad
Growth stocks are being hit hard, but that's good news for certain market players.
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Leading growth stocks were hit hard on Tuesday as overbought and extended technical conditions finally hit a tipping point. The S&P 500 SPY dropped just 0.54% but the real damage was in the leading growth names such as Palantir PLTR, which dropped 9.3% and is down around 17% in a week. The Innovator IBD 50 Fund ETF FFTY was hit for a loss of 4.5%, which is the worst action since the tariff scare back in February.
The key question now is whether this is just a much-needed correction that will be digested quickly or the start of a sustained downtrend. Most pundits and analysts just see this as a healthy correction at this point, but it is downside follow-through that will determine the extent of the problem.
What we need to watch for at this point are failed bounces. V-shaped recoveries have become much more prevalent in recent years, but a failed bounce and a lower low will give the technical bears some ammunition to work with.
Part of the problem for the bulls is seasonality. It is well known that August and September are the weakest months of the year, and to some extent, that is always self-fulfilling. Once the weakness starts, it can entice further selling from traders who are anticipating further seasonal weakness. That is the tendency and is the smart bet.
Another issue is the upcoming earnings from Nvidia NVDA next week. The stock has been trading almost straight up since its last report in late May and has already discounted some very strong news. It is a dangerous sell-the-news setup, but Nvidia is the leader of the AI revolution, and the bullish take is that we are still in the early innings of this transformation industry.
In some ways, it is a relief to have the corrective action right now. It was inevitable to occur at some point and long overdue. We needed resets, and now the market will start to separate out the winners and losers.
This sort of action is hard on index investors, but it's good for those folks who focus on stock picking and finding new opportunities. I'll be busy hunting for some opportunities.
At the time of publication, Rev Shark had no positions in any securities mentioned.
