Price Headley Tells CNBC How He's Prepping for the Brewing Correction

Think the recent setbacks for stocks are just a run of bad luck, or mere coincidence? BigTrends.com's founder and chief doesn't think so.  And, perhaps more alarming, he suspects there's more downside in the cards... soon.

In an interview with CNBC's Street Signs hosts on Tuesday evening, BigTrends' Price Headley commented on the mostly-bearish response to recent earnings reports,  "I think a lot of stuff is priced into the markets right here .  You mentioned with the Salesforce (CRM) earnings that were good but stock's down after hours, we're seeing a lot of "sell on the news" types of reactions, and that kind of concerns me -- makes me think the stock market is fairly, fully priced, at least in the short term. "

Among those matters already priced in is all the upside of a healthy enough second-quarter earnings season as well as a likelihood that a beleaguered President Trump will still be able to get some sort of tax overhaul put in place sooner than later.

Indeed, those matters may be more than priced in thanks to the 19% runup the S&P 500 dished out between early November and early August. With the euphoria starting to wear off and investors realizing they may have gotten a little ahead of themselves, Headley is now calling for some more robust selling. He explains of the market:

"I'd say it needs probably a 5% correction...  nothing too terrible, just little bit of a haircut.  We had 74% of the companies in the S&P 500 beat estimates, which is about 10 percentage points more than usual, and yet we just saw far too many companies selling off after they put out really good news.  Usually when I see that it means things are a little overheated and due for a little rest."

A 5% correction from Tuesday's closing price would pull the S&P 500 back to 2330, near where it found a floor in March and April. A more typical 10% correction from the early August high would pull the index back to 2240, around its December lows.  Any point in between could serve as a support line that ultimately prods a reversal... reversal potential that would only matter if the S&P 500 breaks under Monday's low of 2417 and continues to sell off. We've toyed with the breaking before, but have yet to actually push past the point of no return. This time is a little bit different.

Don't read too much into the pessimistic outlook though, or over-react. Headley added "I don't think it means we're at the start of the bear market.  I think it means more to see more of a quick, corrective kind of market, though I do think it's one you need to be prepared to have some cash on the sidelines and be ready to buy the dip."

As for what traders can do to combat it, the usual suspects are always on the table. Those are, shorting stocks, or buying puts. Price has a very specific alternative strategy also in mind though. His approach?

"The version of shorting we'd be doing here is buying volatility, by buying call options on the CBOE Volatility Index, or VIX, which is basically a play on some sort of fear spike.  I predicted on your show a few weeks back the volatility would essentially double in the next couple of months, and we went up from about 10 to 16, or up about 60%.  I think we're still due for a move above 20 before we get to the bottom of this corrective activity.  So we're definitely playing for higher volatility in the near term."

The VIX closed at 12.25 on Wednesday. The last time it was at or above 20 was in early November, when a major bottom was forming in front of a prolonged rally.

To watch the entire Street Signs clip, go here.