The Tide is Set to Change for Large-Cap Stocks

The stock market is still going up. Large-cap stocks have had an enormous run, and I can’t help but think that a correction is due. It will take a catalyst for this to occur, although I’m not quite sure what it might be.

The Federal Reserve recently spoke, and the market wasn’t too worried about what it said.

The catalyst could be a corporate earnings surprise, but just one company isn’t going to move the market.

A surprise catalyst could also be strong inflation data and/or some kind of geopolitical event. The Chinese stock market could crash, for example.

Regardless, I think it’s best to be cautious over the near term.

One point that is very relevant to my cautionary tone is that I’m just not seeing the number of attractive investment opportunities these days as I saw at the beginning of 2006. This may not be relevant in the grand scheme of things, but it could be a low-level signal that the stock market is starting to “roll over.”

I may be dead wrong, but my gut feeling is that we’re in for a period of change soon. It would be very unhealthy for the main stock market indices to keep going up without some period of consolidation.

Maybe large-cap stocks have been rallying lately because there is now more certainty in the market. The Federal Reserve has pretty much taken an interest rate reduction over the near term off the table. Investors were speculating that the central bank may reduce rates towards the middle of this year. Now there’s more certainty about monetary policy than there had previously been.

The price of oil is also going up again. Some believe that this is actually good for the economy, because if the price of oil is too low, it will reaccelerate the economy too much and inflation will get out of control.

I guess the whole economic system is trying to balance itself out. I believe that the stock market won’t find equilibrium until we get a correction.