Shares could see a 10% correction by early October due to a trifecta of bearish factors, strategist says.

• Renaissance Macro’s Jeff DeGraaf predicts a 10% stock market decline amid three bearish factors.

• Tech stocks could underperform after the rate cuts, which affects market stability, according to DeGraaf.

• “There’s still a little bit more safety on this correction, which is likely to happen before we’re done,” DeGraaf said.

A triple of bearish factors could send stocks down about 10% over the next few weeks, according to Renaissance Macro Research founder and technical strategist Jeff DeGraaf.

In an interview with CNBC on Wednesday, DeGraaf said the Nasdaq 100 could trade at 17,000, a key technical level he monitors that represents a 10 percent downside from current levels.

For the S&P 500, DeGraaf is closely watching the early August low of 5,120 for a potential retest of support. This level represents a downside of around 7% from current levels.

DeGraaf is concerned that sentiment remains in bullish territory, which is not typically seen when the market is at or near a low.

“When we look at where the sentiment is in terms of small speculators on NDX futures, they’re still very, very net. In other words, they used this weakness as a buying opportunity. And it’s usually not correct. behavior to create some kind of low,” DeGraaf said.

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

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

Finally, DeGraaf said tech stocks, which have led the market higher since the bull market began in October 2022, typically underperform in the three months after the Federal Reserve’s first interest rate cut.

“When we look at technology in particular, 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.

“So while it looks like the ordeal is on its way 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 kind of piling up on us here.”

As for how the decline plays out, DeGraaf said there could be further weakness towards the end of September that will extend into early October.

Such a decline would create a two-month window of stocks with little movement, which can “become quite discouraging for people,” DeGraaf said.

Another potential downside could come in the form of a rapid increase in positioning among trend followers and “all-out panic” among investors, similar to what happened in early August amid the breakout in the yen trade.

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Until either of those two things happen, DeGraaf sees short-term stock market risks tilted to the downside.

“We haven’t seen any of that yet, and that’s why we think there’s still a longer safety window for this correction, which is likely to happen before we’re done,” DeGraaf said.

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