Opportunity ahead? A week of negatives increases the likelihood of a market correction


The positive outlook for the third quarter stumbled out of the door. The cause was four negative points which increased the uncertainties:

  1. China’s actions against Chinese companies listed in the United States
  2. The growing negative effects of Covid-delta
  3. US government concerns / actions regarding large US corporations
  4. Contrary stock model: Stagnation in meme stock decline

None of these elements argue in favor of a serious decline in the stock market. However, the increased uncertainties create the possibility of a market correction. Therefore, raising funds now could be beneficial.

Disclosure: The author sold positions in shares on Friday, July 9

1. China’s actions against Chinese companies listed in the United States

Besides the damage to the operations and stock prices of these companies, there is the larger question of where China might act to affect US interests.

2. The growing negative effects of Covid-delta

First, the delta is spreading around the world, causing some reopening adjustments. Second, the minimum 10% efficacy of a single vaccination injection (on a schedule of two) means that only the fully vaccinated are mostly (95%) protected.

3. US Government Concerns / Actions Regarding Large US Businesses

The result could be restrictions on business strategies, increased government oversight, and tighter limits on business structure and expansion. Naturally, all the major leading companies (Amazon, Alphabet, Apple, etc.) will be prime targets.

This resolves three fundamental problems. The last item is a measure of investor psychology. This is important because this stock market has a very popular and very overvalued subset of stocks. They will break down at some point and maybe have a short term effect on the stock market in general.

4. Contrary stock model: Stagnating meme stock decline

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

These declines took stocks even further below their 52-week highs: Tesla is (27)% below, GameStop is (60)% below, and AMC is (36)% below. By comparison, the median stocks of the S&P 500 and DJIA are (7)% lower.

These numbers, in themselves, are not the whole problem. Add in the time since it peaked at 52 weeks (Tesla was Jan 25, GameStop Jan 28, AMC June 2) and investor patience becomes an issue. Then, adding the reduced activity (volatility = excitement) as shown in the 30 minute interval chart below, stocks appear to be stagnating on the downside.

Finally, combine this image with The Wall Street Journal Column “Heard in the street”, “Meme Stock Fantasy becomes reality for GameStop and AMC. “This article contains a good explanation of the psychology behind cutting edge investing which takes a popularity rating from” true believer “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 reduce some of the optimism by adding uncertainty. Because the stock market has been rising steadily and happily, even a small dose of negativity could produce a pause and a drop. So having some purchasing power at your fingertips seems like a good strategy.

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