Market Lab Report - Premarket Pulse 8/25/16

Published : August 25 2016 at 8:45 ET

Major averages fell on higher volume with the S&P 500 closing at its 20-day moving average. Certain Chinese stocks as well as a few other frothy names have had sharp pullbacks, not terribly surprising as this has been a market of taking profits when you have them in context with the chart. Of course, if your stock has not hit your sell stops, or made a big move where profit taking could be warranted, then there's no reason to sell.

The action in many of these hot IPOs, however, could represent a type of short-term speculative blow-off, hence could serve as a cautionary sign. At the very least, investors should recognize when a stock they are long is becoming well-extended to the upside and at least partial profits should be taken without letting greed overtake them. As these stocks, including names like TWLO, ACIA, and LN, for example, sell off hard into deep areas of potentail support, investors should be alert to possible lower-risk entry points developing in the process.

Raised nerves ahead of Yellen's speech this Friday could take the market down further since short, sharp corrections occur with frequency, though we have not had any correction of significance that has lasted more than a couple of days since the Brexit lows. Even though one could occur, CME FedWatch futures still show less than a 20% chance of a rate hike in September, and less than a 50% chance of a hike all the way out to February 2017.

So the ebb and flow of the markets may allow one to capitalize on pullbacks in the right stocks (use our Weekend Focus List as a guide) while a more substantial correction may assist on the short side or at least help keep one's powder dry before wading back into the markets on the long side.

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