The Looming US Stock Market Correction

Did you know that the Dow Jones Industrial Index has surged higher for eight straight quarters?

It marks the first time it has managed this in 20 years.

The Dow is now trading above 22,500 points. Who would have thought that was possible a few months back?

I certainly didn’t.

But we shouldn’t be surprised. There’s little reason to be bearish on stocks yet. France, the Netherlands and Germany elected pro-EU leaders. Brexit has been delayed for another two years. Emerging stock markets have been stable. And US interest rates have crept higher since October last year.

There’s little to lose sleep about.

According to the Stock Trader’s Almanac, October is setting up to be a good month for stocks. In years following a presidential election, the Dow Jones has been up 11 times on 17 occasions. That said, the almanac also warned about years ending in ‘7’. October was when the stock market plunged in 1987, 1997 and 2007.

I’d be cautious…

Take a look for yourself

Phil Erlanger says every year ending in ‘7’ experienced a pullback going back to 1907. In the early 1990s, Phil was the Head Technical Analyst at Fidelity Research. He made billions betting on junk bonds, currencies and equities. Today, his analysis impacts over US$1 trillion in capital across the globe.

One of his notes, called the ‘Seven Year Itch’, shows the Dow’s seasonality with years ending in ‘7’.

Take a look at the images below:

Dow Jones Industrial Average Cycle Seasonality 4-10-17


Source: Phil Erlanger Research
[Click to enlarge]

Dow Jones Industrial Average Cycle Seasonality 4-10-17


Source: Phil Erlanger Research
[Click to enlarge]

Dow Jones Industrial Average Cycle Seasonality 4-10-17


Source: Phil Erlanger Research
[Click to enlarge]

Those charts paint a million words. The Seven Year Itch looks extremely powerful. It appears US stock markets could still experience a correction this year. That’s what the 81-year cycle shows for years ending in ‘7’:

Dow Jones Industrial Average Cycle Seasonality 4-10-17


Source: Equity Clock
[Click to enlarge]

If you pay close attention to the graph, October is a month to watch for stock market corrections. On average, the US stock market falls by 8–10% during this month.

David Stockman, who served under US President Ronald Reagan, has sounded the alarm bells. CNBC reported on 30 September:

David Stockman is warning about the Trump administration’s tax overhaul plan, Federal Reserve policy, saying they could play into a severe stock market sell-off.

Stockman, the Reagan administration’s director of the Office of Management and Budget, isn’t stepping away from his thesis that the 8½-year-old rally is in serious danger.

“There is a correction every seven to eight years, and they tend to be anywhere from 40 to 70 percent,” Stockman said recently on CNBC’s “Futures Now.” “If you have to work for a living, get out of the casino because it’s a dangerous place.”

Stockman is a well-known stock market bear. He’s called a correction multiple times, but has been wrong on many occasions. For example, he told CNBC the S&P 500 could easily fall to 1600 points in June. That would have represented a 34% drop at the time. This week, the index was trading at record levels, above 2500 points. 

A broken clock is right twice a day

My view is that we’re well overdue for a stock market correction. There hasn’t been a 10% correction since January 2016. That’s not normal in a healthy bull market. Perhaps the change in trend could have something to do with Trump’s tax bill. Stockman thinks Wall Street is delusional for believing it will even be passed.

That could be true.

Healthcare reform failed three times. Trump’s tax bill probably won’t pass either. The tax bill has some highly debatable proposals, after all. Trump plans to raise taxes on the middle class, while reducing the rate for wealthy individuals.

Democrats will vote against it. And even if the Republicans vote in favour of it, the likelihood is that it probably won’t pass the Senate.

Senators Lindsey Graham and John McCain are both anti-Trump. My view is that they will pretend to support it and change their minds at the last minute. That’s what John McCain did to the healthcare bill.

Don’t expect any reform in Washington this year.

When that becomes clear, the US dollar should fall alongside stocks. It means that we probably won’t see another US interest rate increase this year. Potentially, all this could unfold while the Fed is unwinding its balance sheet.

I don’t know when stocks will peak. But, in my view, it could be either this month or in November. In any case, get ready for a stock market correction into year end.

Regards,

Jason Stevenson,
Editor, Resource Speculator

PS: Despite a potential looming stock market correction, I believe the best time to be buying stocks is during a correction. That allows you to make the most of any near-term rewards on offer. But you need to be able to spot the right opportunities.

I’ve found what I believe to be is the hottest nickel stock on the ASX right now. In my view, you could potentially make gigantic gains buying in at these dirt-cheap prices. More details here.


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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