Market Correction Gains Steam, But 3 Positive Events Are on the Horizon
Investors worry about corrections constantly, but are almost always surprised when they suddenly gain momentum.
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In Ernest Hemingway's 1926 novel, The Sun Also Rises, Mike Campbell is asked, "How did you go bankrupt?" "Two ways," Mike says. "Gradually, then suddenly."
That is how market corrections take place. There is a gradual deterioration in price action, and then suddenly a full-blown market selloff. Investors worry about corrections constantly, but are almost always surprised when they suddenly gain momentum.
The market has been hinting at a correction for a while, but each time it looked like it was going to accelerate, there would be a quick recovery, and the fears would be forgotten. That didn't happen this time. The market bounced on Wednesday on hopes that the Supreme Court might partially reverse the Trump tariffs, but then the worries about AI valuation that came to the forefront in Palantir's (PLTR) earnings report took hold again.
There was a late bounce that fizzled out and then a close near the lows of the day, which is not a good sign. Nearly 70% of stocks finished with losses, and only 17 of the 100 stocks in the Nasdaq 100 (QQQ) managed gains. The Russell 2000 (IWM) finished under its 50-day simple moving average for the first time since May.
Overall, the senior indexes have barely pulled back. The S&P 500 is less than 3% from its all-time highs, but it feels much worse since there have been so few pullbacks since the market started its uptrend back in April.
Three possible positive catalysts may help to provide support, however. The first is a resolution of the government shutdown. There is plenty of chatter about a potential deal occurring soon, but the political animosity should not be underestimated.
The second potential positive is the increased likelihood of a Fed interest-rate cut in December. Jerome Powell caused some market disturbance when he said it was not a sure thing, but with recent news about elevated layoffs and other poor economic indications, the likelihood of a cut is increasing again.
The third potential positive is end-of-the-year seasonality. November through early January is typically the strongest period of the year. This is a tendency and not a certainty, but if the technical action improves, there are improved odds that it will be self-fulfilling.
While this action is painful, it is needed and it is healthy. We need to shake out the excesses and rebuild a wall of worry. Don't be in too big a rush to anticipate a market turn, but be ready with a shopping list if there is better price action.
Have a good evening. I'll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
