Brian Paragamian | Jan 21, 2014 10:55PM ET
Calling for a significant stock market decline in 2014 is a fairly simple call for me. For the bulls on the other hand, they are looking for more gains based on hopium and delusional forecasts. The Feds facilitated move is about to end in a significant way.
Pundits and Analysts Bullish Case for Higher Stock Prices:
From many reads and listening very carefully to the so-called pros (pundits & analysts), I honestly can say this is what their bullish case revolves around.
My Bearish Case for Lower Stock Prices:
I could have continued with more reasons to support my bearish case for stocks but this will suffice. I believe the bull case for higher stocks is based on delusions and without merit, while the bear case is very logical but will take time to evolve.
Topping Process
I think it is important to understand this is going to be a process that will take time to complete the topping pattern. In addition, it is important to realize there will not be a traffic light signal that tells you when the process is complete. For now, the boys and girls of Wall Street are doing their best to employ leverage and keep this market alive; holding key support levels. This is something we saw all of last year every time a correction was attempted but this game is about to END, and very soon. I think it is also important to point out that in terms of hedging and one-sided speculation in both funds and options; one can very clearly see that very few are short this market and nobody really owns any true protective puts or hedges. For now, we are in the transition phase of a market that has gone far too high, for far too long of a period of time and will begin a down phase. You could see this market decline 20% (S&P 500 1470) and the MAJOR UPTREND would still not be broken off the March 2009 lows.
The monthly S&P 500 chart above looks parabolic; these types of moves never end well. Just remember everything typically takes time and this is going to be a process; patience must be used.
Conclusion:
I think so many analysts are very confused and find it tough to maintain a coherent perspective on this stock market because soaring stock prices in theory should equate to a real economic recovery. We do not have a real economic recovery nor do we have a blistering economic recovery as the stock market move would suggest. The S&P multiple is simply not justified based on earnings or economic growth. I find it of interest that 2014 earnings estimates for the S&P 500 went from $106 in late December to a revised number of $121; a 14% increase. If historical data is any indication, that move by analysts will prove to be incorrect as they almost always fall short of their forecasts. Why the revision higher though, I ask? To rationalize higher S&P levels? Even if we had real earnings growth from revenue growth, along with meaningful economic growth; I would still be looking for a minimum of a 10% decline since we are so extended and have not had one for an extended period of time. The lack of any real pullback I believe signals the bulls are afraid that if they let this go, it could get out of control on the downside.
This is a stock market that has been held together by the Fed and has zero correlation with actual growth rates of today. The Fed stimulus is about to be slowly wound down and it will have a negative effect on stocks based on historical data. This means the S&P 500 will have to sober up to reflect the new normal growth which is going to be somewhere between 2%-4%. The proceeding decade was an abnormal anomaly. With that being said, the S&P 500 and all the averages will revert back to the mean that reflects the “actual”, not imaginary growth rates of the year or so ahead. I see no reason why in the fullness of time (decline could last into 2015), we do not see a 15%-20% decline from S&P 500 1851 peak (top has been seen in my estimation) or maybe more (30%-40%) depending upon world events. Although rare, if we had a singular event occur or if we break key support levels, we could even see a stock market crash as the ingredients exist.
The time has come to where we will get a reversion back to the mean with normalized valuations based on real earnings and real economic growth. This is by far, one of the largest disconnects we have seen between Wall Street and Main Street. Once the decline really begins in earnest, it would not surprise me if we did not see new All-Time-Highs for several years thereafter.
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