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Eyeing a Correction, Not a Collapse

Our weekly regular, Barclays Jordan Kotick tells us what to look for in the coming weeks.

Kotick Tick By Tick
CNBC.com
Kotick Tick By Tick

Q: As the summer winds down, what should investors keep an eye on in the autumn?

A: In a word, "seasonality".

As you can see from the first chart, September is the worst month of the year for stocks markets in the US and generally speaking, equities globally.

Given the run up the market has seen through August, it is becoming extended and due for a pullback.

Q: Does this mean stocks are going to fall as aggressively as they did last September?

A: We don't think so. We are looking for a correction, not a collapse.

Q: What should we watch to suggest this downside move is beginning?

A: Many things, to begin with, when leaders stop leading, it is a warning sign. So the banking stocks are worth watching but it is important to watch them both on an outright and relative basis against the broader market. This is on the second chart. The latter we would argue is often more important. While the absolute price is still going higher, the market leadership is becoming more labored. If this turns to the downside, this would be bearish for stocks since usually, relative weakness precedes absolute weakness.

Banking vs. S&P
Banking vs. S&P
Banking vs. S&P

Q: So this is going to be a dangerous time for equities in September and October?

A Not necessarily. Think of it like hurricane season. It does not mean that a major hurricane will strike, only that this is the season where things can be vulnerable. Same with stocks. The autumn corridor is when US equities have seen significant downside moves, September has the worst returns of any month and yet, there have been a significant amount of autumns where stocks went higher. In a nutshell we are not saying that stocks going lower every September/October, but it does mean one should more sensitive than usual for any signs of market weakness or vulnerability

Q: Any other things to watch?

A: As always, intermarket relationships are a very telling sign of investor psychology. As you can see in the third chart, with GBP/JPY on top, WTI Crude in the middle and US 10 year yields below, these different markets and different asset classes have been forming the same pattern. All are sensitive to risk, all went higher into the summer and have been range bound since. While there is a slight lead/lag, the similar pattern is not a co-incidence. They all tend to go higher when the investors and market psychology is favorable towards risk. So a breakdown in any or especially all of these markets would be warning flag for equities to take note of.

US 10 yr Yield
US 10 yr Yield
US 10 yr Yield

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Questions? Comments? Write toinvestoragenda@cnbc.com

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