US stock market selloff: Four indicators suggest correction may not be over

The recent selloff in US stocks has left investors searching for signs of a market bottom, but four key indicators suggest it may be too early to declare the correction over, according to a Reuters analysis.

Technology and artificial intelligence-related stocks have fallen around 10% from their recent peaks after the Nasdaq-100 hit a record high in early October. While shares have stabilised somewhat, investor positioning, options activity and technical indicators continue to signal caution.

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Technology positioning shows signs of easing

According to Deutsche Bank data cited by Reuters, investors have reduced exposure to technology stocks since late September, shifting towards other sectors. The latest selloff pushed tech positioning below levels recorded during the April 2025 tariff-related market turmoil.

Deutsche Bank strategist Parag Thatte said the decline appeared to be driven by investors unwinding crowded positions. He added that positioning levels could create conditions for a technology sector rebound.

Stock correlations offer some relief

Another relatively positive signal is the limited increase in expected stock correlations. Barclays strategists noted that three-month realised correlation among the 50 largest S&P 500 companies fell to a record low in late September.

Although expectations for correlations increased during last week's selloff, the rise remained modest. Rocky Fishman, founder of Asym Research, said this suggested investors viewed the decline as a sector-specific correction rather than a broader economic downturn, Reuters reported.

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Options activity presents a mixed picture

Retail investors had purchased call options on individual stocks in record volumes this year, helping support the AI rally. However, that trend reversed sharply last week.

According to Carrick Lane data, retail call buying in AI stocks dropped significantly, contributing to the post-election selloff.

The shift has reduced excessive bullish positioning, but options indicators have not weakened enough to provide a strong buying signal.

Technical indicators remain cautious

Technical signals continue to suggest that the market may not have reached its bottom. Mark Newton, head of technical strategy at Fundstrat Global Advisors, said the rebound in the Invesco QQQ ETF, which tracks the Nasdaq-100, had stalled below its downward trend line.

Weak short-term momentum and the absence of a DeMark exhaustion signal suggest US stocks could remain volatile for another couple of weeks, Newton said.

Overall, while reduced technology exposure and relatively stable stock correlations offer some encouragement, options positioning and technical trends suggest investors should remain cautious before calling an end to the market correction.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)