September Outlook: Worst Month Primed for Overdue 10% Correction
By: Jeffrey A. Hirsch & Christopher Mistal
August 31, 2017
As the unofficial close of summer nears this market that has been unwilling to go down since last fall may be running into a host of obstacles that could lead to a typical September/October correction of at least 10% and potentially more. It has now been 567 calendar days since the last 10% correction, which is nearly two months past the average 515 days between corrections. While the topping process has been elusive up until now, several factors are lining up that could force the market lower.
First off, it’s September, the most tumultuous month of the year highly prone to corrections and market declines, especially at month end and the week after Triple Witching. With the market seemingly refusing to correct since the election, it is set up for the typical late-Q3/early-Q4 swoon. 
Sentiment remains complacent with bulls running near 50%. There are bears and skeptics out there, but “buying the dip” continues to be the norm. Technicals and internals are less than robust with the indices leaking higher on a dwindling Advance-Decline line, decreasing new highs and expanding new lows. Reports of late cycle employment, productivity and housing data plateauing and beginning to roll over are also concerning.
News from the geopolitical front is anything but encouraging. The White House has not been able to deal with anything on its agenda from healthcare reform to tax reform to infrastructure spending or much else for that matter. The standoff with North Korea is not encouraging and now the Hurricane Harvey disaster will require a lot of attention and money out of the feds. 
Meanwhile our Three Peaks and a Domed House Top Pattern (3PDH) scenario continues to play out. We may not see a full completion of the pattern back to the February 2016 point 14 low, but a 10% correction back to turn-of-the-year levels is quite likely and a full blown bear is not out of the realm of possibilities, but that make not happen until next year. Not on the 3PDH chart below we have moved point 23 to the August 7 high.
[3PDH Chart]
Pulse of the Market
As August comes to a close, DJIA (S&P 500, NASDAQ and Russell 2000) have all recovered from mid-month lows (1) and with the exception of S&P 500 and Russell 2000 are poised to finish with modest full-month gains. Strength over the past two weeks is on the verge of turning DJIA’s faster and slower moving MACD indicators (2) positive. Earlier in the month, DJIA traded above 22,000 for the first time ever and that old high could prove a challenge for the current rally.
Dow Jones Industrials & MACD Chart
DJIA (3) and has recorded a weekly gain in ten of the last fourteen weeks, S&P 500 (5) has logged nine weekly gains over the same time period and both are on course for another gain this week. During this streak of weekly strength, traders and investors have not shied away from buying on Fridays. DJIA has been up ten of the last fourteen (4). But, follow through on subsequent Mondays has been spotty with DJIA down seven and up seven. NASDAQ has not fared as well recently with four weekly losses out of the last five (6).
NYSE Weekly Advancers and Decliners (7) continue to be mostly a mixed bag. One exception to this observation occurred during the week ending August 11 when Decliners heavily outnumbered Advancers, 2527 to 561. This was the greatest number of Weekly Decliners since January 15, 2016. At that time, the market did not hit bottom until February 11. 
After increasing throughout most of July, NYSE Weekly New Highs (8) quickly dried up in August while NYSE Weekly New Lows quickly expanded. Last week (and most likely this week) that trend reversed. As is often the case in later stages of a bull market, the number of Weekly New Highs tends to fade with each new fractionally higher, high. This fading participation generally warrants caution.
The spread between the 90-day Treasury Rate and the 30-Year Treasury Rate (9) appears to be bottoming out. Mid-month weakness triggered a retreat in short-term rates that outpaced the decline in long-term rates. Continued flattening of the yield could be an issue for banks and potentially even the Fed.
Pulse of the Market Table