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The equities markets have reached a top and are due for a pullback by about 15% - 20% in the New Year, said Gareth Soloway, chief market strategist at InTheMoneyStocks.com.
“We’re now getting to a point where we have such inflated valuations that if you don’t get this monstrous beyond 35% earnings growth [that some analysts are forecast] then markets are going to sell-off pretty sharply,” Soloway said.
While the S&P 500 has broken out above its multi-year trendline, history suggests that every time this has happened in the last few years, a correction follows, Soloway noted.
“While you inched above [the trendline recently], this is what I would call the lighter holiday volume traffic, where if you have less participants in the markets, things can overshoot just a bit, I’m not sold that this is breaking out to the upside just yet. To me, this is still waffling around the trendline and very likely should break down coming into January,” he said.
Importantly, market gains usually coincide with high levels of unemployment.
“When unemployment was maximum in March, 2009, we actually got a big market move, percentage-wise, during that period. As unemployment comes down, you actually see the market gains coming down, so the idea here is that the market is always forward-thinking. The more it looks into the future and factors in good news, it goes up really quickly, but as that period actually arrives, it doesn’t have much more in it because it’s already factored that in, so I think that’s iwhat’s going on here,” he said. “That’s why I think you could be in a multi-year high.”
By David Lin
For Kitco News
