Stocks seem wobbly. Are markets heading for a correction?

March 4, 2021 at 03:48 PM

Stock markets across the world look overvalued, and many market participants are calling for a correction. Many catalysts could cause a sharp sell-off – such as rising yields, inflation pressures, strengthening US dollar, and so on.

The greenback usually advances during risk-off sentiment. Considering the dollar index has broken to the upside from a large falling wedge pattern which is a bullish formation, further gains seem likely. 

As we saw last week, the entire market, including small and mid-cap markets, is sensitive to sharp increases in rates. Tech companies, which usually have no earnings, dropped the most as they are the most sensitive to higher rates. 

Should the USD and yields continue to go higher, it will most likely cause some serious troubles in the equity markets. 

Additionally, according to the Bank of America, investors’ cash levels fell to 4.0%, triggering a “sell signal”; The last time the sell signal was triggered was in February 2020 – everyone knows what happened next.

Another indicator from the Bofa, the Sell Side Indicator (SSI), is about sending a sell signal. The last time the indicator was this close to “Sell” was June 2007, after which we generally saw 12-month returns of -13%. 

The long-term trend in US stocks is still bullish, and only a very significant correction would change that. However, the short-term picture doesn’t look so positive, and we might see some declines over the next few days.

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