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Just Because the Quarter's Over Doesn't Mean Turbulence is

James 'Rev Shark' Deporre says the rotational correction is realigning big- and small-cap valuations.

September 30 marked the end of the quarter, but it doesn’t signal the end of the current market correction.

James “Rev Shark” Deporre says the correction is rotational in nature, which brings unique pressures to market investors.

“The corrective action that started in early September has been playing out in various forms for more than three weeks now,” Deporre wrote recently in Real Money. The most recent drop, before Monday, “was sharp enough for the Nasdaq 100 to undercut the lows it hit on Monday, Sept. 20, but the Russell 2000 has held up relatively well and is still substantially above the levels that it hit on that day.”

The correction continues to be a rotational one that is enabling the gap between big-cap growth names and secondary stocks to close. “The small-caps topped out back in February and underwent a very ugly correction. It was even worse because it was mostly hidden,” Rev Shark noted. “The indices did not reflect what was going on, and the media were mostly blind to it.”

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Deporre said it’s mostly been large-cap and growth stocks in corrective mode, while secondary stocks have shown resilience.

“A good illustration of the stocks that are under the most pressure is found in the Innovator IBD 50 Fund ETF (FFTY),” Deporre said. “These are the top 50 stocks as chosen by Investor's Business Daily; they are primarily very high-growth names with strong relative strength and they are trading near their highs. Last Tuesday, that ETF dropped 5.4%, and every stock was in the red.”

The current corrective and rotational market trend isn’t unusual. “It occurs periodically and deals with the excesses that regularly develop,” Deporre noted.

Headline issues like the debt ceiling and fiscal stimulus drama ongoing in Congress, should remain in play for a while longer. “That’s creating some of the nervousness, although these things are always resolved at the last minute,” Deporre said. “This issue is impacting bonds and interest rates and that is spilling over into equities.”

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