Brian Jackson
There's a correction coming, and how markets deal with the aftermath is likely to set the stage for the rest of 2014.
That's the outlook from David Tippin and Ron Meisels, the brains behind technical analysis shop Phases & Cycles. They paint a picture of an S&P 500 bull market that, while still strong, will turn five years old in March, qualifying it as "geriatric".
That is not to say the good times are about to end. Indeed, there is plenty of evidence to suggest that this bull has room to run. However, Messrs. Tippin and Meisels see a significant bump in the road ahead.
"Some post-holiday fuel may push the markets modestly higher in January. But this is a month where we believe the markets will start to run out of gas. This should lead to a first quarter correction of the powerful and now-extended advance. This correction should be more extensive than any of the pullbacks seen in 2013."
They explain that the last major correction in this bull market was a drop of nearly 22 per cent from May to early October in 2011. Since then, the S&P 500 is up about 72 per cent, making another extended correction (of up to 8 per cent) long overdue.
So what might set off such a correction? Ironically, a further spike in the uptrend would be the most likely catalyst, as any sudden overstretch would invite profit-taking and threaten market momentum.
"We expect that 2014 will be a much more volatile year for the markets [than] the steady upward progress seen in 2013. Should the markets correct early in the year as anticipated, it will then give us a better idea of how capable the bulls are of successfully climbing the next mountain."
You can read the full report here.