Tuesday, 13 June 2017
Is the stock market correcting downward this summer?
The Nasdaq Composite index has been on the watch last Friday, as blue-chip companies like Apple, Amazon, Alphabet, Facebook and Netflix strongly reversed into a sell-off. The question is whether it was a merely occasional issue or that move is anticipating an even bigger correction.
To be honest, the situation is not looking very optimistic. Weak trading volumes, financials showing thin activity and retail sector companies trending red are not painting the best summer picture. Indeed, some analysts said a big summer correction is on its way.
Deutsche Bank strategist David Bianco has recently pointed out that the next 5 percent move in the S&P 500 is “more likely down than up,” according to a note released on Friday.
While the German bank’s Asset Management team believes the equity rally is still on, it warned that it “has reached its near-term limits and is vulnerable to summer fatigue and rising anxiety over whether Congress can make pragmatic decisions”
There are several factors currently playing on stock sentiment. First, the Federal Reserve interest rate decision on Wednesday, which could clarify plans for monetary policy this year. Second, a widely anticipated corporate tax reform which is planned for the second part of 2017. These events play on different sides, which should somehow offer some balance. But the Fed interest rate comes first almost for sure.
In addition, DB strategists said “we are not alarmed by current S&P valuations, but we don’t think it’s a good near term entry point either.” They highlighted that “the S&P often achieves a high in spring, but in summer it often consolidates.” and that’s precisely why seasonality supports their idea of not pursuing a rally this warm season.
Deutsche Bank is not the only big bank warning about a correction on the Street. JP Morgan’s chief technical analyst is sending a similar message:
"The market keeps a bullish trajectory for now, but we see a growing probability for a summer top and correction into [the] fall, [...] If US economic surprise indices do not rebound and lead to a bearish trend reversal in Treasuries this summer, we ultimately think the current trend deceleration now present in equity indices will turn into bearish reversal patterns, which in turn could lead to a tradable correction into the fall," wrote James Hunter, head of JPM’s global fixed income and US equity technical strategy.
While nobody can be 100 percent sure of how markets will develop in the next few weeks, if DB and JPM say a big wave is coming, you should at least think about the possibility and analyze how to position yourself to safeguard your money or take the most out of a correction.
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