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A micro correction in US stocks and a rate hike is back on the table?

Keep your eyes peeled on the major US equity indexes in the coming week because that may just be the leading indicator for a potential rate hike by the fed.  Yes, once again, as stocks stared into the abyss just a week ago, with the Dow posting over a 1,000 point decline to start the week, it was the magical buyers that came to the rescue by week’s end to neutralize much of the losses.  In fact, if the major indexes can post just another couple of percent gains this week, the carnage over the past weeks will look like a mere blip.

As a result of the gains posted in stocks from the dismal lows, the fed has not yet relinquished the possibility of the September hike.  If stocks remain stable to positive, with a few more good economic reports, there is still a chance for a snug in rates.

A couple of caveats to note however….if stocks manage to continue to post gains without retesting some of the lower price action set last week, this will not bode well for the market in the future.  What the sector needs is a healthy and normal correction by building time and value at lower levels in order to post more healthy future gains.  The froth needs to be neutralized a bit.  We will put a note of caution for equities in the near term however given the continued turbulence in China.

As far as a rate hike goes…the market doctor team isn’t excited about any fed tightening in the near term, since even a pair of 25 basis point moves, which is not likely, would only result in rates remaining near zero anyway.  We don’t see a major steepening of the curve due to economic indicators.


Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR


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