Here’s Why Any Correction Won’t be Severe


According to James “Rev Shark” Deporre, the largest barriers the stock market faces right now are negative seasonality and a short supply of positive catalysts.

That scenario isn’t expected to change anytime soon.

Deporre, writing in Real Money, noted that the economy still shows signs of slowing down, especially with the Delta variant hanging around. But unlike the past 18 months in pandemic mode, this time the Federal Reserve won’t be riding to the rescue with massive stimulus programs. “Fiscal stimulus is likely stalled due to political battles, so there aren't many positive drivers as we wait for the end of the third quarter,” he wrote.

Current trading activity reflects the natural ebb and flow of the market. “There is nothing very remarkable about it,” Deporre states. “Stocks that have had good runs need some rest, and there is a confluence of technical, fundamental, and seasonal conditions that are making it happen.”

Investors are struggling with how much selling will actually occur and how long that activity will last. It’s the great unknown on both issues, unfortunately, as traders will just have to track pricing action and wait for a shift in the wind.

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In the meantime, traders shouldn’t fret too much, Deporre notes.

“There are two reasons that I don't expect this correction action to turn into anything major. The first is that most stocks are not wildly overvalued or extended,” he said. “Only 47% of all stocks in the market are currently trading above their 200-day simple moving average. The DJIA is a couple of thousand points above its own 200-day simple moving average, but it hasn't been representative of the overall market all year. Most stocks have already corrected, but the indices do need to catch up to the downside to some degree.”

A second reason for maintaining a positive view of this corrective action is that it continues to be individual investors that are driving this market. “Investors still have an appetite for stocks and are looking to take advantage of dips and pullbacks.”

Rev Shark’s strategy is to stay patient and let this corrective action play out to a greater degree but not to be too negative. “This environment will create opportunities that will pay off by the end of the year, but timing is the key,” he said. 

Get more trading strategies and investing insights from the contributors on Real Money.

Get more trading strategies and investing insights from the contributors on Real Money.

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