Hindsight is 20/20 and the financial media is quick to point out that the ‘long awaited correction’ has finally arrived (financial tabloids morphed from stock market cheerleader to doomsday sayers in less then a week).
Here’s the media’s actual real time wisdom expressed in five headlines:
Reuters: “Big Year Ends with Wall Street Hopeful for 2014” – December 27, 2013
MarketWatch: “Wall Street Sees S&P 500 rising 10% next Year” – December 27, 2013
Barron’s: “Morgan Stanley’s Adam Parket: 2014 in 2014 for the S&P 500 – December 27, 2013
CNBC: “Jeremy Siegel: Dow Jones to 18,000 in 2014” – December 31, 2013
CNBC: “Dr. Doom Roubini Gets Bullish on Global Economy” - January 2, 2014
It is still possible that the S&P 500 (^GSPC) will rise 10% this year. The S&P may even rally to 2,014 as the Dow Jones (DIA) climbs to 18,000.
But, nothing goes straight up. A German saying warns that: “Everything’s got an end, only sausages have two” (only Germans can wrap up wisdom and sausages in the same sentence).
Running Out of Fuel
Like a fire, a stock market rally needs fuel in the form of new buyers. Stocks can’t rally without buyers.
The December 20 Profit Radar Report featured the composite sentiment / S&P 500 chart shown below and warned:
“The problem with excessive bullishness is that it causes investors to go all in. Based on the above polls, investors are fully invested, or nearly so. A fully invested person can only do one of two things: hold or sell. Neither action buoys prices. Based on current data, it looks like bullish sentiment will catch up with stocks in January. This should cause a deeper correction.”
View enlarged S&P 500 / sentiment chart here
The January 15 Profit Radar Report stated that: “The S&P 500 is closing in on technical resistance at 1,855 and we are alert for a reversal.”
Will the Rout Last?
A number of early indicators suggest that 2014 will be a tough year.
The tough year is just beginning, but the Profit Radar Report's 2014 Forecast stated that: “A Q1 correction may find support at 1,746 – 1,730,” which is where the S&P 500 (SPY) closed on Monday.
This may spark a counter trend rally, but will likely lead to even lower levels.
From Rout to Bear Market?
Since the mid 1970s the S&P 500 and Dow Jones have precisely adhered to two very reliable long-term cycles. Every cycle has seen a major high or low. For the first time in 14 years, both cycles coincide and project a major high in 2014 (we all know what happened 14 years ago). Here's a detailed look at the two cycles and their message: