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As outlined in our previous email, the weekly trend of the U.S. stock market has now confirmed a transition into a correction phase beginning with the first week of September.
This represents a significant shift from the bullish outlook we had maintained at the beginning of August and again in our outlook at the end of August, when we expected the September market to have the potential to extend its upward trend. With the latest market developments, however, the probability of the existing uptrend continuing has now become very low.
The decline this week was larger than initially expected. Although the market staged a sharp rebound on Friday, the strength of that rebound was not sufficient to restore or extend the weekly uptrend.
One of the decisive factors behind this change continues to be the increasing likelihood of a prolonged U.S.-Iran conflict. The persistence of the conflict has contributed to a sharp increase in oil prices, with WTI crude breaking above the $100 level. This has heightened concerns over inflation and increased expectations for potential interest-rate hikes, raising broader concerns about a more restrictive monetary-policy environment.
As a result, the market's buying-versus-selling supply-demand balance is coming under increasing pressure.
In particular, as discussed in our previous email, the market is now approaching a potentially critical point where the existing buying demand that has supported upside expectations and provided downside support could weaken materially.
If this critical threshold is breached, selling pressure could strengthen rapidly while buying demand weakens sharply. This could result in a significantly larger and faster decline than the market has experienced so far.
Investors may therefore want to take this potential change in the supply-demand structure into consideration when developing their investment strategy.
Impact on Individual Stocks
This potential shift in market sentiment is also important when evaluating individual stocks.
As overall market sentiment deteriorates, individual stocks can experience a much faster transition toward the downside, and the magnitude of their declines may become substantially larger than previously expected.
Therefore, for stocks with a high degree of correlation to the broader market, investors may want to respond more carefully and sensitively to changes in the overall market trend.
Since the weekly trend has now confirmed its transition into a correction phase, we expect the corrective trend to continue through the end of September.
During this period, the daily market is likely to show a combination of limited or temporary rebounds and an overall downward trend, with periods of stronger selling pressure potentially emerging as the correction develops.
Accordingly, we believe it is important to remain well prepared for downside risk through the end of September and to maintain a more conservative approach rather than interpreting short-term rebounds as a confirmation of a new uptrend.
At this stage, we expect a more visible low-buying opportunity to emerge around early October, as the September correction progresses and the market approaches a potentially more favorable risk-reward environment.
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