Here’s what could trigger more stock market pullbacks this year, says Schwab

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Out of steam?

A record-setting August for stocks has set the bar high, and September looks off to a mixed start, with electric-car maker Tesla (TSLA) poised for more big gains after a newsy premarket.

The big question for investors is whether this stock market will keep up the momentum?

I am fighting myself not to try the “Vanity Trade” of picking a top in the equity market, if even for a correction. But the potential megaphone top and Weekly DeMark is rather alluring… pic.twitter.com/YSRDDL26qt

— Raoul Pal (@RaoulGMI) August 31, 2020

That brings us to our call of the day from Schwab Center for Financial Research’s vice president of trading and derivatives, Randy Frederick, who thinks the stock market may finally deliver on some much-needed corrections.

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“Obviously these things are difficult to pinpoint, but a 2%-3% decline sometime in the next couple of weeks wouldn’t be at all surprising to me. I continue to believe that the SPX

(SPX) [S&P 500] can reach 3,700 (+14.5%) by year-end, but probably not without three or four small pullbacks along the way,” he told MarketWatch in an interview and follow-up email.

“We haven’t had anything of that nature at all since going all the way back to early June, when we had that big drop-off. We’re clearly way overdue on that,” Frederick said. And while 3,700 sounds “pretty remarkable from a bottom-of-the-virus return,” on a year-to-date basis that 14% gain for the S&P 500 is fairly average, he noted.

When those smallish pullbacks come along, though, he advises against panic (he urged no panic in early March too), saying “they will be and should be used as buying opportunities.” That is because there is nowhere else for investors to put their money as any Federal Reserve interest rate increase is years out, said Frederick. And investors should learn from those who panicked out of the market in 2008 and missed out on an 11-year bull market, he added.

One potential correction trigger is technical, as he says 2020 has been closely tracking the action in 2009. That year saw three pullbacks — 3.5%, 4.3% and 5.6% in the last few months of 2009 — as his chart shows:

A “substantial pullback in earnings could also trigger a pullback,” he said, noting that second-quarter S&P 500 earnings per share came in far better than expected.

Frederick is watching the coronavirus pandemic as a potential trigger, with schools opening across the country and the potential for a dramatic uptick in the case count spooking markets, while trade issues with China shouldn’t be dismissed, as they also have the power to unhinge markets.

Another stick of dynamite for stocks is continued wrangling over enhanced unemployment benefits in the U.S. “That’s a big issue that needs to be resolved on what they should do to support workers and small business going forward,” said Frederick.

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The market

Nasdaq-100 (NQ00) futures are tearing higher, but Dow (YM00) futures are sliding, with S&P (ES00) futures off modestly. European stocks (XX:SXXP) are falling, with the euro (EURUSD) at a two-year dollar high. Gold (GC00) and oil (CL) are up, and Asian stocks were mixed.

The buzz

Tesla’s premarket climb has been slowed by news it will sell up to $5 billion worth of its stock. Also, an analyst said the electric-car maker is “fundamentally overvalued.”

Shares of Zoom (ZM) are surging, after the videoconferencing group soundly beat forecasts. Companies paid up for the service.

Apple (AAPL) reportedly ordered 75 million 5G iPhones, and shares are up.

Retailer Walmart (WMT) is launching a $98 a year membership program offering fuel discounts and free shipping, to perhaps rival Amazon Prime (AMZN)

An update on manufacturing from U.S. purchasing managers, construction spending and automobile sales are ahead. China delivered stronger-than-expected manufacturing numbers.

President Donald Trump has defended his decision to visit Kenosha, Wis., on Tuesday, and offered up a defense of the teenager who shot two protesters. Democratic rival Joe Biden accused him of making things worse. A shooting in Los Angeles late on Monday has also drawn protesters.

Random reads

“I wish we had more time” — actor Michael B. Jordan’s moving tribute to late co-star Chadwick Boseman.

Belarusian opposition leader says protesters are vanishing.

Don’t miss the Corn Moon.

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