Stocks could see a 10% correction by early October due to a trio of bearish factors, strategist says

• Renaissance Macro’s Jeff DeGraaf predicts a 10% stock market drop due to three bearish factors.

• Tech stocks could underperform after rate cuts, impacting market stability, DeGraaf said.

• “There’s still a bit of a run-up to this correction that’s probably going to happen before we’re done,” DeGraaf said.

A trilogy of bearish factors could send stocks down about 10% in the coming weeks, according to Jeff DeGraaf, founder and technical strategist at Renaissance Macro Research.

In an interview with CNBC On Wednesday, DeGraaf said that the Nasdaq 100 could be negotiated at 17,000, a key technical level he is monitoring what represents a 10% drop from current levels.

For the S&P 500DeGraaf is closely monitoring the early August low at 5,120 for a possible retest of support. This level represents a decline of about 7% from current levels.

DeGraaf is concerned that sentiment will remain in bullish territory, which is usually not the case when the market is at or near a bottom.

“When you look at where the sentiment is among retail speculators on NDX futures, they are still very, very long. In other words, they have used this weakness as a buying opportunity. And that is generally not the right behavior to create some kind of bottom,” DeGraaf said.

The S&P 500 is about 3% below its record high, while the Nasdaq 100 is down about 8%.

The bullish sentiment among traders is also contrasted by the fact that September has always been a bad month for stocks.

Finally, DeGraaf said that technology stocks, which have led the market higher since the start of the bull market in October 2022, typically underperform in the three months following the First Federal Reserve interest rate cut.

“If you look specifically at the tech sector, it doesn’t do well after the first rate cut. It’s very pro-cyclical, cyclicals tend to underperform for at least three months after the first Fed rate cut,” DeGraaf said.

“Even though it feels like the ordeal is underway and good things are likely to happen, the data probably continues to be weaker and I think that’s one of the things that’s accumulating here.”

As for the course of the decline, DeGraaf said there could be further weakness towards the end of September, extending into early October.

Such a drop would create a two-month window during which stocks see little movement, which can “get quite discouraging for people,” DeGraaf said.

Another potential decline could come in the form of a rapid positioning move among trend followers and “outright panic” among investors, similar to what happened in early August amid the crisis. Explosion of the carry trade on the yen.

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Until one of those two things happens, DeGraaf believes the near-term risks to the stock market are tilted to the downside.

“We haven’t seen either of those yet, and that’s why we think there’s still some time before that correction happens,” DeGraaf said.

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