MORNING BID – Recipe for a correction

August 4, 2014

The ingredients have been in place for some time for a correction – it’s only taken some kind of spark to ignite them, and yes, it’s a bit early for such mixed metaphors. The market has dipped 3.2 percent from its highs, and while that’s not all that much, it’s enough, as Dan Greenhaus of BTIG puts it in late Sunday commentary, to generally result in a bit of dip-buying. That said, the softness of late in auto sales and some really ugly housing data does point to the possibility that the economy’s direction is just squishy enough to warrant a bit more of a pullback, and Greenhaus, one of the Street’s more reliable bulls right now, says even his firm doesn’t “have high conviction right now” as far as a rally.

With the Russell 2000 having given up a more significant portion of its gains — this small-cap index was a super underperformer throughout July and hasn’t really distinguished itself for all of 2014 — and the earnings season for the most part starting to wind down (particularly for bigger names) there doesn’t end up being a lot of real good reasons to take the market higher right now. Sure, investors on some levels may start to put money to work, but given the thin volumes the appetite for additional risk is probably going to be muted. The one exception may be from foreigners, who will probably keep pushing money to the U.S. market, in part because of favorable interest rate differentials.

The question is whether the weak technicals investors are seeing in the Russell are going to be replicated across the big-cap S&P 500. Many stocks are in corrections currently, and the Russell currently is approaching oversold territory – near support levels around 1080, according to RBS strategist Robert Sluymer. He notes that we could see a rebound around the middle of the month, but the leadership in the mid- and small-cap indexes has been weakening compared with the large-cap names. That doesn’t mean the entire market is doomed – but does possibly augur for more lackluster action in the next several weeks.

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