Will the Stock Market Correct in October?

As we ended August of this year, many of our overbought/oversold indicators reached levels that told us the odds were high that the stock market would rally in the next 30-60 days.  You can see below that the percentage of stocks that were trading above their 50-day moving average reached that magic "30" level that "almost" always indicates an impending rally.

True to life, we did experience a rally, and depending on where you are invested, the rally has produced some very nice gains.  We've noted how growth stocks have been very strong, while many of the more defensive value stocks have started to lag - really a new trend for the first time since 2011.  This is a very good sign, but back to the chart above.  We need to point out that the rally from that oversold juncture has not exhibited as much "oomph" as you would normally like to see.  The downward slope in this participation rate has become even more visible.  

Of course, if you are a growth stock investor you don't mind so much, but with some of the other evidence, it does continue to set up our thesis that this stock market is ready to correct. 

Don Hays

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