August – October Correction

US stocks continue to outpace world markets despite increasing evidence of a US economic slowdown and weak corporate earnings. Equities are heavily influenced by expectations of future business earnings, yet stocks remain elevated in part due to the high confidence in aggressive rate cutting by our Central Bank that is assumed will stimulate our GDP and profits. Rate cuts rarely stimulate economies, but they will provide some modest support for stocks as long as the Fed rate cuts keep coming each month. Foreign stock markets are much weaker than the US, but we should expect a corrective trading range in the weeks ahead. Fed failure to cut rates will be greeted by a new selling if the next FOMC meeting September 17th disappoints.

On July 29th, the day of the the 2019 all time record highs to date, we wrote a newsletter titled “August correction?”looking for a buy the rate cut rumor, sell the news market drop in August in an ongoing Bull market. The day before the current August correction bottom we said to look for a minimum  8% drop then a rally no higher than the 2970’s basis the SP 500 Index. ExecSpec quotes are shown in the chart below. A short term top here may lead to renewed selling through the week as we carve out a corrective trading range that could last until October. SP 2850’s – 2860’s is near term support, with a new test of the 8% correction lows at risk if that zone breaks down.

We are encouraged that 2 of our 4 primary sentiment gauges have already reached oversold levels, which may make it hard for prices to move below the recent 8% correction low. As can be seen below, there were two large corrections in the stock market in 2018 and both lasted about 13 weeks. A similar duration congestion pattern would target October before markets would have a higher odds of a new trend to the upside. Economic cycle lows due late 2019 to early 2020 combined with the escalating super power trade war and collapsing global interest rates would seem to reduce the odds of positive fundamental catalysts arriving in 2019 to allow sharp new highs in equities. If the consumer led economy in this 3rd quarter can withstand trade war pain and manufacturing contractions, then oversold market sentiment will eventually allow another run to record highs in year 2020 if manufacturing can stabilize and rebound slightly.

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