Can a 10% Equities Correction Occur By the End of This Quarter?

Large institutional players like Morgan Stanley or Bank of America are already warning against overextended valuations in US equities, making a larger corrective move very likely as the prices continue to edge higher. CFD traders need to cautiously trade stocks and indices in the near future, given there could be many reasons with stocks could turn south. To come to the rescue, we decided to talk about 3 main drivers of a larger selling move as this quarter gets to a close.

equities correction
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#1 Higher interest rates to put pressure on tech stocks

As we already know, big tech names like Apple, Microsoft, Apple, or Google represent a large share not just of the Nasdaq but also of the S&P500. Rising long-term interest rates had long been treated as a headwind for tech and now that the US 10Y yield continues to break higher, a similar scenario should unfold.

The 1.3% level on the 10Y is assumed to be “the breaking point”, where tech might be under pressure. For now, the Nasdaq continues to move higher and the markets don’t seem to care about rising yields at the long-end of the curve.

#2 Missed expectations with regards to US stimulus

Alongside the higher yield environment, it would be important to consider that since the beginning of the year, markets had been pricing in high expectations in terms of US stimulus. The $1.9 trillion package is projected to be passed by Congress with a very slim majority, however, any changes with that respect could put heavy pressure on stocks.

The Republican side had been advocating for a slimmer package, but now that the Democrats have control over both the White House and Congress, it doesn’t seem to be important.

#3 Flow-based moves at the end of the quarter

Most CFD traders should be aware that a lot of the positive performance in the stock markets is actually generated by massive options buying. As a result of out-of-the-money call options buying, dealers need to hedge exposure by buying stocks, pushing valuations to new extremes.

If we analyze the charts we can notice a surge and then a sharp decline at the end of each quarter, when quadruple witching occurs. That is when dealers remove the hedges by selling stocks. A similar scenario should occur this quarter as well, given speculation via options had not eased, but accelerated further.

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