Three Signs the Market Is Heading for a 20% Correction

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The S&P 500 cracked new highs for the week on Friday as the Russell 2000 index pulled off its recent highs.

And listen up – because this may be the start of the “last squeeze” of this market’s bull run.

That’s right. I’m calling it now… a correction is coming.

Three big yellow “caution lights” flashed across my screen last week. And these are three big signs that the market is getting ready to drop anywhere between 10-20%.

Does this mean that you should sell everything and prepare for a market crash?


Remember my Trading Commandment – “Volatility is a trader’s best friend.”

Volatility creates opportunities for those willing to watch for them. Those opportunities come in the form of the chance to buy some of the high-flying stocks when they make these healthy corrections.

It’s called buying the dip. And it’s one of the best ways to start generating long-term wealth.

According to my radar, here are the top five “buy-the-dip” candidates this week…

Your Top Five Buy-the-Dip Candidates for Long-Term Wealth

Why do I think the market is getting ready to head lower?

Well, first off, take a look at the IPO market. It hit a frenzied state at the end of 2020 as companies rushed to the market to close their deals while investors’ greed for quick returns was hitting a fever pitch. This is almost always a sign that it is time for the market to take a “healthy break.”

Secondly, investor sentiment has reached historically optimistic readings. Last week’s Investors Intelligence Poll shows that the bulls outweighed the bears by a ratio of 3.4 to 1. Historically, anything higher than three is indicative of a crowded market, which normally precedes a correction of 10-20%.

The CBOE Volatility Index also plunged towards a reading of 20 last week. This indicates that bullish investors may be getting ahead of themselves and that a healthy correction is needed to get the market ready to push to its next level higher.

Lastly, I’m looking at stocks’ relative strength indexes (RSI). Last week’s rally triggered a massive number of “overbought readings” from the leading sectors. 75% of the alternative energy stocks, 67% of the materials companies, and 54% of the small-cap Russell 2000 companies had RSI readings that registered as “overbought” last week.

Bull markets are fun when they go up. They’re even more fun when they go up as fast as they have since the November election. But that kind of fun is over… for now. Instead, it’s time to watch these five buy-the-dip candidates of the week:

You may notice that the majority of these stocks come from the alternative energy sector – or, as I like to call them, the “new tech” stocks.

See, the market is shifting. In fact, it’s bifurcated.

That’s one of my favorite words to use to describe the market. Basically, this means to “divide into two branches or forks,” which is exactly what we’re watching this market do right now.

The division I’m talking about, however, has nothing to do with Republicans and Democrats. Instead, I’m referring to that rare situation when a large money migration begins to take place as the result of a political shake-up.

This bifurcated market began to form back in November as materials, alternative energy, and oil stocks started to break into new bull market trends.

At the same time, large-cap technology, healthcare, and utilities started to turn lower, along with the homebuilding sector. Get used to those divisions, as they are likely to stay in place for the next three months.

Now, the homebuilders got soft because they were entering a seasonally weak period of the year. The winter months usually see a slowdown in construction for an obvious reason: it gets cold.

But the other three? They have everything to do with the shift in political winds that this market is going through.

Tracking these winds will uncover opportunities all over the place for the first three to four months of the new political calendar.

And some of the biggest opportunities are coming from the “new tech” stocks, as the new administration has a clear focus on a clean energy initiative.

I’m talking about alternative energy stocks like SunPower Corp. (Nasdaq:SPWR), Blink Charging Co. (Nasdaq:BLNK), and Plug Power Inc. (Nasdaq:PLUG).

On the flipside, large-cap technology stocks are facing the potential that a democratically-run Washington D.C. will start tackling the antitrust issues that have been not-so-subtly mentioned during various hearings.

Frankly, this may help companies like Facebook Inc. (Nasdaq:FB) that could generate extra value with the spinoff of Instagram, which would be good for investors.

But that’s a long game view. In the short-term, these stocks will not perform as they did in 2020.

It’s time to shift your focus. Goodbye FAANG, hello new tech.

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Until next time,

Chris Johnson

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