Here’s what could turn a ‘breather’ for stocks into a bigger correction

As for stocks, our call of the day points out that they are looking expensive and yes, a correction could be coming.

Led by a 15.8% gain for the S&P 500 SPX, +0.75%, the first half has been a great one for markets, said Miller Tabak Co.’s chief market strategist Matt Maley. But given the S&P 500 has gained just 4% from end-April, 75% of that rally has taken place in the first four months of the year, he told clients in a note on Monday.

Maley expects the stock market to take a “breather” over the very short term to digest those first-half gains, and given equities are looking overbought and a bit expensive, he said the question to ask is what would turn a “breather” into a full-blown correction?

Look to chip stocks — a sector that has seen huge demand from the reopening trade — for answers, he suggested.

He pointed to the VanEck Vectors Semiconductor exchange-traded fund SMH, +0.55%, which has been bumping against its February and April highs for the past few weeks, though not much past that. “Therefore, we’re going to have to see more upside follow-through to confirm that the chip stocks are going to lead the broad stock market higher,” he said.

Maley also looked at specific activity for a handful of chip stocks, such as Nvidia NVDA, +1.36%, which has rallied 50% over the past seven weeks, but is looking a little too popular, he said. Its Relative Strength Index chart — a technical indicator used to determine whether a stock is overbought or oversold — has moved above 82, which is close to overbought conditions seen in late August and February of 2020. The stock fell 42% and 20% respectively, shortly after that, he said. As well, another key stock, Micron Technology MU, +0.27%, got hit by a “sell the news” reaction in early July.

While Nvidia is a great stock, it has also seen four sizable corrections in the past 18 months, he said.

“When you combine the fact that NVDA has become a somewhat vulnerable after its big run over the past seven weeks…with the poor performance in MU last week…there are reasons to think that the chip group might fail to break above its all-time highs in a meaningful way (much like it failed to do in April). If (repeat, IF) the SMH rolls-over in any significant way over the near-term, it’s going to be tough for the broad market to rally a lot more,” said Maley.

Read: Is the market pricing in ‘peak growth’? These charts suggest as much, says a leading strategist.

Chinese apps in trouble and a stalemate for OPEC +

Stock futures ES00, -0.01% YM00, -0.01% NQ00, +0.15% are flat, with European equities SXXP, +0.20% are also struggling, though airline stocks have been rising after Germany opened up travel for fully vaccinated U.K. and Portuguese visitors. Bigger drops were seen in Asia, where China’s CSI 300 000300, -0.05% fell 1%, as technology names got hit by fresh regulatory scrutiny for the sector.

More on that as U.S. shares of Chinese app makers are dropping in premarket trading, after probes by China’s cybersecurity regulator. Shares of ride-hailing group Didi Global DIDI, -5.30% are down over 20%, with truck-hailing apps owner Full Truck Alliance YMM, +2.26% and Kanzhun BZ, -2.13%, which owns an online recruiting app, also down by double digits.

Crude prices CL.1, +0.37% have pushed past $76 a barrel, after the Organization of the Petroleum Exporting Countries and its allies failed in their third attempt to resolve a deadlock on lifting production levels. Edward Morse and a team at Citigroup said the spat could drive Brent crude BRN00, -0.78% (hovering at $77 a barrel) to $80 and keep it there awhile.

On the data front, the Institute for Supply Management’s service index for June is coming after the market open.

There has been yet another China crackdown on bitcoin, it seems. The cryptocurrency BTCUSD, +1.87% has eased back, after a report that China’s central bank shut down a company in Beijing that provides software services for digital currency transactions.

Israeli health ministry data reportedly showed vaccine effectiveness against the highly contagious delta coronavirus strain dropping from 94% to 64%, with 55% of new infections found among fully vaccinated people, though vaccines are still preventing serious illness. The country uses Pfizer PFE, +0.43% 0Q1N, -2.40% –BioNTech BNTX, COVID-19 shots.

Travel to Canada for Americans may now be opening back up, while a surge in COVID-19 cases in Springfield, Missouri has led to a ventilator shortage.

Random reads

The staycation industry can get stuffed, says the U.K. man who was told it would cost his family £71,000 (just over $98,000) to stay a week in Cornwall.

Iceland’s four-day workweek trial has apparently been a huge success.

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