Opportunity Ahead? A Week Of Negatives Increases Probability Of Stock Market Correction

The third quarter’s positive outlook stumbled coming out of the gate. The cause was four negatives that increased uncertainties:

1.  China’s actions against US-listed Chinese companies
2. Covid-delta’s expanding negative effects
3. US government’s concerns/actions regarding large US companies
4. Contrary stock pattern: Meme stock downward stagnation

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None of these items argue for a serious stock market drop. However, the increased uncertainties do create the possibility of a stock market correction. Therefore, raising some cash now could be beneficial.

Disclosure: Author sold stock positions on Friday, July 9

1. China’s actions against US-listed Chinese companies

Besides the damage done to those companies’ operations and stock prices, there is the larger question about where else China might act to affect U.S. interests.

2. Covid-delta’s expanding negative effects

First, delta is spreading throughout the world, leading to some reopening adjustments. Second, the minimal 10% effectiveness of only one vaccination shot (from a regimen of two) means only the fully-vaccinated are mostly (95%) protected.

3. US government’s concerns/actions regarding large US companies

The outcome could be restrictions on corporate strategies, added government oversight and narrower limits on corporate structure and expansion. Naturally, all the big leading companies (Amazon, Alphabet, Apple, etc.) will be prime targets.

That takes care of three fundamental issues. The last item is a measure of investor psychology. It’s important because this stock market carries a subset of highly popular, highly overvalued stocks. They will break at some point and perhaps have a short-term effect on the general stock market.

4. Contrary stock pattern: Meme stock downward stagnation

In this quarter’s first six trading days, the S&P 500 rose 1.7%. During the same period, Tesla declined (3.4)%, GameStop dropped (10.6)% and AMC fell (18.3)%.

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Those declines took the stocks further below their 52-week high prices: Tesla is (27)% below, GameStop is (60)% below and AMC is (36)% below. For comparison, the median stocks in both the S&P 500 and the DJIA are (7)% below.

Those numbers, by themselves, are not the whole problem. Add in the length of time since making their 52-week highs (Tesla was January 25, GameStop was January 28 and AMC was June 2) and investors’ patience becomes an issue. Then, adding in the reduced activity (volatility = excitement) as shown in the 30-minute interval chart below makes the stocks look downwardly stagnate.

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Finally, combine that picture with The Wall Street Journal “Heard on the Street” column, “The Meme Stock Fantasy Is Becoming a Reality for GameStop and AMC.” That article contains a good explanation of the psychology behind leading edge investments that take on a “true believer” popularity valuation until “the curtain falls.”

The bottom line: The four negatives set the stage for a possible buying opportunity

The underlying fundamentals remain positive for this stock market. However, the four negatives trim some of the optimism by adding in uncertainty. Because the stock market has been happily and steadily rising, even a small dose of negativity could produce a pause-and-drop. So, having some buying power handy looks to be a good strategy.