August 20, 2014

Still believe in a down year for stocks

For many months I have projected a down year for stocks, anticipating a broad S&P 500 trading range of between 1700 and 1950 for 2014.

I am sticking to this forecast.

If I had to hazard a guess, I would say that a reasonable year-end price target for the S&P 500 would be in the 1825-1875 area. 

In terms of timing, I believe that we are now on the cusp of a textbook 10% correction from the 2014 highs.

The first test of the S&P 500's 200-day moving average since November 2012 (namely, into the 1860 area) seems possible by the fall.

I am assuming that a second and deeper test to about 1780, representing a 10% correction, will evolve a bit later in the year, which would also a near-perfect 23% Fibonacci retracement from the 2011 low.

Retail investor sentiment has grown optimistic, a contrarian signal. As this chart indicates, retail investors' cash allocation has dropped to the lowest level since 1999.

According to Merrill Lynch, institutional fund managers are also all in.

Complacency (a self-satisfied view that fails to consider negative outcomes) remains an ongoing threat to the bull market. 

I believe that the entrenched strategy of buying the dips and the notion that short-selling is a mug's game will likely be repudiated if my ursine market assessment is correct.

Risk assets are named so for a reason.