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U.S. Equities: 5 Signs the Recent Pullback is Healthy
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Market Correction: Healthy or Unhealthy?
In a recent update for my Tech Innovators trading service, I warned of the potential for short-term weakness in the major indices. Below are the three data points I provided:
1.) “Gravity: Stocks Could Use a Break after “Frozen-Rope” Rally
Since flushing in mid-April, the Nasdaq 100 Index ETF ((QQQ - Free Report) ) is up six straight weeks and more than 8%. A short-term correction would not be abnormal after such a strong and continuous advance in equities, in fact, it would be quite healthy for bulls to see.
2.) Lack of Participation: Breadth is Poor
Outside of the VanEck Semiconductor ETF ((SMH - Free Report) ), and many of the components in it, breadth (market participation) was poor. In other words, the market indices were only being held up by a small sliver of all components, potentially masking short-term weakness beneath the surface due to a lack of participation.
3.) Higher Rates
Rates perked up today which is something for bulls to monitor closely.”
Since my commentary, markets retreated in the short term before ripping higher Friday afternoon. However, as I have learned throughout my investing career, flexibility is strength not a weakness.
“Probably one of my greatest assets over the last 30 years is that I’m open minded and I can change my mind very quickly.” ~Stanley Druckenmiller
5 Reasons to Be Bullish
Market Breadth is Healthy
Without broad participation (breadth), bull markets are doomed to fail. The NYSE New Highs-New Lows list is the best way to track market participation. Though net lows outweighed new highs for a single session last week, markets are again printing more fresh highs than lows – a sign of broad participation and strength.
Image Source: Stockcharts.com
Price Action: Bullish Moving Average Retest in SPY & QQQ
The 10-week moving average is the best barometer of the intermediate trend for the major indices. After clearing the moving average last week, the S&P 500 Index ETF (SPY) and Nasdaq 100 Index ETF (QQQ - Free Report) successfully retested it from above – a sign that bulls stepped in.
Image Source: TradingView
The AI Revolution: Leaders Are Leading
Every bull market has a theme. This time around, AI-related stocks such as Nvidia ((NVDA - Free Report) ) and Arm Holdings ((ARM - Free Report) ) are Leading the way. I live by the thinking “so go the leaders, so go the market.” If that line of thinking holds, stocks are on solid footing. NVDA beat Zacks Consensus Estimates for a sixth straight quarter, adding fuel to the fire.
Image Source: Zacks Investment Research
Bullish Election Year Seasonality Trends
Seasonality studies how stocks perform historically. Historically, June tends to deliver powerful results during election years (like the one we are in now)
Image Source: Ryan Detrick, Carson Investment Research
Rate Cuts are Likely
Markets are beholden to liquidity, and the biggest liquidity provider is Jerome Powell of the Federal Reserve. The CME FedWatch tool is currently pricing in three potential interest rate cuts into year-end.
Bottom Line
The recent pullback in U.S. equities looks temporary. Several bullish catalysts point to higher prices into year-end.
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U.S. Equities: 5 Signs the Recent Pullback is Healthy
Market Correction: Healthy or Unhealthy?
In a recent update for my Tech Innovators trading service, I warned of the potential for short-term weakness in the major indices. Below are the three data points I provided:
1.) “Gravity: Stocks Could Use a Break after “Frozen-Rope” Rally
Since flushing in mid-April, the Nasdaq 100 Index ETF ((QQQ - Free Report) ) is up six straight weeks and more than 8%. A short-term correction would not be abnormal after such a strong and continuous advance in equities, in fact, it would be quite healthy for bulls to see.
2.) Lack of Participation: Breadth is Poor
Outside of the VanEck Semiconductor ETF ((SMH - Free Report) ), and many of the components in it, breadth (market participation) was poor. In other words, the market indices were only being held up by a small sliver of all components, potentially masking short-term weakness beneath the surface due to a lack of participation.
3.) Higher Rates
Rates perked up today which is something for bulls to monitor closely.”
Since my commentary, markets retreated in the short term before ripping higher Friday afternoon. However, as I have learned throughout my investing career, flexibility is strength not a weakness.
“Probably one of my greatest assets over the last 30 years is that I’m open minded and I can change my mind very quickly.” ~Stanley Druckenmiller
5 Reasons to Be Bullish
Market Breadth is Healthy
Without broad participation (breadth), bull markets are doomed to fail. The NYSE New Highs-New Lows list is the best way to track market participation. Though net lows outweighed new highs for a single session last week, markets are again printing more fresh highs than lows – a sign of broad participation and strength.
Image Source: Stockcharts.com
Price Action: Bullish Moving Average Retest in SPY & QQQ
The 10-week moving average is the best barometer of the intermediate trend for the major indices. After clearing the moving average last week, the S&P 500 Index ETF (SPY) and Nasdaq 100 Index ETF (QQQ - Free Report) successfully retested it from above – a sign that bulls stepped in.
Image Source: TradingView
The AI Revolution: Leaders Are Leading
Every bull market has a theme. This time around, AI-related stocks such as Nvidia ((NVDA - Free Report) ) and Arm Holdings ((ARM - Free Report) ) are Leading the way. I live by the thinking “so go the leaders, so go the market.” If that line of thinking holds, stocks are on solid footing. NVDA beat Zacks Consensus Estimates for a sixth straight quarter, adding fuel to the fire.
Image Source: Zacks Investment Research
Bullish Election Year Seasonality Trends
Seasonality studies how stocks perform historically. Historically, June tends to deliver powerful results during election years (like the one we are in now)
Image Source: Ryan Detrick, Carson Investment Research
Rate Cuts are Likely
Markets are beholden to liquidity, and the biggest liquidity provider is Jerome Powell of the Federal Reserve. The CME FedWatch tool is currently pricing in three potential interest rate cuts into year-end.
Bottom Line
The recent pullback in U.S. equities looks temporary. Several bullish catalysts point to higher prices into year-end.