“January Indicator” Points to a Terrible 2014 for Stocks

Why Stocks Are Too Risky NowThe stock market looks like it’s in big trouble. This shouldn’t be a surprise to my readers; I have predicting this event for months.

So far in 2014, and we are only three weeks into it, the Dow Jones Industrial Average has shed 709 points (4.3%). But I think the explosions for 2014 are just getting started.

History has proven that whenever investor optimism increases, and there’s a general sense of security in the stock market, the market unexpectedly comes crashing down.

Investors and stock advisors just got way too confident and optimistic about the stock market. Since the S&P 500 rose about 30% in 2013, the general consensus was that the rise in stock prices would continue into 2014.

But here’s the reality of the situation…

In 2013, S&P 500 companies posted their slowest earnings growth since 2009. By the end of last year, the number of companies issuing negative corporate earnings guidance for their next quarter reached the highest ever recorded. (Source: FactSet, January 2, 2014.)

The Chicago Board Options Exchange (CBOE) Market Volatility Index (VIX), better known as the “Fear Index,” has reached a six-year low. The VIX is telling us that investors are as confident today (have less fear about stock prices declining) as they were in 2007. Well, we all know what happened after 2007.

The “January indicator” says that if the stock market falls in January, it usually falls for the remainder of the year. So far, January has been a disaster for stocks.

2013 was a record year for stock buybacks, a financial engineering exercise that props up per-share earnings.

And the amount of money investors have borrowed to buy stocks, as measured by the NYSE margin, is at its highest level ever. This is another contrarian indicator.

Volatility Index - New Methodology Chart

Chart courtesy of www.StockCharts.com

Optimism mixed in with irrationality and money printing drove the stock market higher in 2013. But as I have been writing, this can’t go on forever. 2014, as I have warned, will be a very difficult year for the stock market. And now that the downturn is upon us, the question is “how far will she go?” The stock market moved higher than most people thought. I believe it will now fall lower than most people can fathom.

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