I’m getting increasingly nervous about the current stock market and its vulnerability to the downside. We have a fragile economic renewal, weak corporate revenue growth, muted jobs growth, a housing market that’s stalling, an upcoming leadership transition at the Federal Reserve, and the government still needs to hammer out a budget and debt ceiling deal by February. So yes, I’m nervous.
Nomura strategist Bob Janjuah believes global stock markets could fall by 25%–50% in the final three quarters of 2014. (Source: Clinch, M., “Stand by…a hefty drop’s on the way: Nomura’s Janjuah,” CNBC, November 6, 2013.)
While I’m not that bearish, I do believe the chart of the Dow Jones Industrial Average is vulnerable to a six-percent near-term adjustment. (Read “Vulnerable Key Stock Index May Be Signaling Upcoming Buying Opportunity.”) The S&P 500 even looks worse and could see a decline to 800 if the past 15-year pattern pans out. That would be a decline of over 50%, which is what Janjuah is saying.
The chart below shows the current multiyear top and potential decline to the lower support at 800 as reflected by the bottom horizontal line. Also note the declining volume during this most recent multiyear rally, which is considered a negative divergence, based on my technical analysis. I’m not saying the worst is yet to come, but you never know.
Chart courtesy of www.StockCharts.com
As an investor, you want to make sure you are well aware of the stock market vulnerability.
Given the gains over the past four years, you should look at taking some money off the table. Also look at some of your losers, which surely have benefited from the recent run-up, and sell. The somewhat irrational behavior of the stock market has helped to prop up even bad stocks; I view the positive market bias as a second chance to right a wrong and dump your losers.
As I said in previous commentaries, the run-up we are seeing in some of the Chinese stocks and initial public offerings is a pretty good indication the stock market is searching hard for risk in anticipation of higher near-term returns.
As a trader, I would look to trade on weakness and sell on strength. If you are a longer-term investor, don’t be greedy; take some profits and wait for a stock market correction, which I firmly believe is coming. I’m just not sure when, but there will be a buying opportunity in the stock market on the horizon.