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The Correction Has Started: 6 Charts Explain Why

Kevin Cook
A fakeout breakout above S&P 2850 has given way to wider selling that will persist into September.

On August 1st, I made a chart commentary titled Correction Time? Listen to This Grizzly to Decide. I concluded the worst we might see in August was a 5% pullback to S&P 2700.

But since then, the market and its sectors have made some decisive moves to indicate the correction is indeed underway and that at least a 5% drop from the recent highs is a high-probability bet.

Here are those moves, with all the charts included in the video that accompanies this article:

1) S&P 500 made a failed breakout attempt above the July 25 high at 2848

2) Nasdaq 100 leadership, driven by Apple AAPL and other big-cap Tech in early August, made a lower high

3) Semiconductor Index rolling over again and losing its 200-day MA, with Micron MU leading the way down

4) Industrial sector rotating sideways as Boeing BA drops to its 200-day and Caterpillar CAT makes 10-month lows

5) Investors Intelligence Sentiment survey still shows a preponderance of bullish attitudes and positioning

6) The percentage of newsletter writers calling for a correction remains a tame 26.5% for the past few weeks (new data expected tonight from Investors Intelligence)

And don't get me started on Chinese stocks like Alibaba and Baidu getting taken behind the woodshed. See my video from last week for the rationale on good buying opportunities evolving there...

AI Arms Race with China: Deep Learning and Investing

While there are many reasons to support my primary bullish thesis that the S&P will make new highs toward 3000 later this year -- such as economic momentum, low interest rates, and reasonable valuations -- right now, in a seasonally weak period, I have to focus on the risk of a correction where the potential downside in September is probably greater than the upside.

This view is also supported by the market data on mid-term election cycles, which are the worst Q2 and Q3 every four years.

It seems the only thing a Technology bull like me can look forward to is NVIDIA NVDA earnings on Thursday. Maybe Jensen Huang and Co. can re-ignite chip stocks this month.

But I doubt it.

Be sure to watch the video with all the charts to see why, including a detailed look at the Investors Intelligence data.

Disclosure: I own shares of NVDA and MU for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators services. Click Follow Author above to receive his latest stock research and macro analysis.

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