5 Reasons for a correction to expect

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| By Jeff Reeves, MarketWatch

While optimism goes a long way on the capital markets, stock prices can defy only gravity, so long before reality exceeds again unrealistic expectations.

The market continues to truck higher and the S - and P-500 now sits on about 26 percent in year-to-date gains.

But they expect not to last.

For many reasons, the market seems ripe for a correction. No crash, mind you as the Permabears and the bunker crowd would like to see, you can catch only a reality with Wall Street up 10 to 15 per cent jump in the broader indexes.

You see, the face ripping rally for many stocks almost completely in the year 2013 based on mood. And while optimism goes a long way on the capital markets, stock prices can only defy gravity so long before reality surpasses again unrealistic expectations.

Here are five reasons why I have a two-digit correction in the S- & P-500 sometime in the next six months are:

Mutual fund share-based have absorbed more money in 2013 than any year since 2004 - $76 billion, to be exactly vs. total outflows of $451 billion from 2006 to 2012.

If you want to be a fatalist, is the fact that the "dumb money" on the market is returned to the ultimate sign of a top. Alexandra Scaggs of the Wall Street Journal tracked a group of inspiring MOM investors who offer that offers such as "I still think there's huge head on the Exchange... I don't want to miss."

Clearly, the return of retail investors could be more buying pressure on the market and push indices 2014 offer more record highs. But when people start to buy stocks simply because the shares rise, it sounds to me the definition of a bubble.

The Dow Jones was the 37th record high set on Thursday - and as usual, financial media alert investors that happy.

But it is worth noting that eclipses 34 record highs in 2007, correctly set before fell below out.

Records alone are not characters of a bit, of course. Finally the market place 69 new highs - a record sum from record highs, if you will - and further drive in 1995, until the dot-com crash.

But the height of 2013 feel differently in this respect that they are given great importance as an "all-clear" type. Keep in mind that the unemployment rate in the mid 5-percentage range compared to a peak in 1995 was more than 8.2 percent in 1992. Also concerns you, that it not a single year in the 1990s with a GDP growth rate of less than 4 percent. A bull market in stocks was big, but also part of a broader story of the economic might of the Decade.

That has not happened in 2007, such as cracks in the growth story began to emerge. And that is certainly not the case now as persistently high unemployment and anemic growth are the rule.

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Fiscal cliff blues may lead to market correction

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Reuters

Wall Street's post-election sell-off may gather steam in the coming weeks as worries mount about the looming fiscal cliff and technical weakness suggests a possible correction ahead.


The benchmark Standard & Poor's 500 closed below its 200-day moving average - a measure of the market's long-term trend - on Thursday for the first time in five months, and ended below it again on Friday. More than half of the Dow components are trading below key technical levels.

"I don't think you have to panic here, but I think you really want to be looking for the market to move lower for the next couple of months," said Frank Gretz, market analyst and technician for Wellington Shields & Co., a brokerage in New York. "I think the next rally is the rally you want to sell."

At the heart of the market's worry is whether U.S. leaders can come to agreement on some $600 billion in spending cuts and tax increases that are due to kick in early next year. Some fear dramatic cutbacks could send the U.S. economy into another recession.

The prospect of higher tax rates in 2013 is driving investors to sell shares as they seek to decrease the tax impact from their positions this year and next.

"You would have thought the fiscal cliff scenarios would have been already mulled over and priced in, but they weren't. It's almost like the market has ADD and can only focus on one thing at a time," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, whose firm manages about $13 billion in assets.

The S&P 500 fell 2.4 percent for the week, its worst weekly percentage drop since June. The index is now down 6.4 percent from its intraday high for the year of 1,474.51 reached on September 14. That drop puts the benchmark index below its 50-day moving average, but not yet into correction territory, defined as a 10 percent drop from a peak.

Reading the technical signs
The S&P 500 has been trading in a range between the 50-day moving average of 1,433.50 and the 200-day moving average of 1,380.98 for about two weeks. A significant break below that lower level could be a precursor to further weakness, analysts said.


"There's a technical breakdown in the market that indicates further losses," said Adam Sarhan, chief executive of Sarhan Capital in New York. "A 10 percent drop is the next big line in the sand."

The primary driver of stock prices in coming weeks looks likely to be investor concern about the U.S. fiscal situation.

In a sign of the risks involved, comments by President Barack Obama on Friday about the upcoming negotiations caused stocks to sharply cut their gains.

The president, who defeated Republican candidate Mitt Romney in Tuesday's U.S. election, outlined a position for the fiscal issues on Friday that is far apart from that of his political opponents, suggesting a long battle is to come.

"If the market anticipates a resolution to the fiscal cliff or Europe or any of the other bricks in the wall of worry, we could easily take off," Sarhan said.

Seventeen of the Dow's 30 components are trading below both their 50-day and 200-day moving averages, while another eight are under their 50-day levels, but not their 200. Only five components - Bank of America, JPMorgan Chase, Home Depot, Johnson & Johnson and Travelers - are above both support levels.

Another big negative for the market has been heavy selling of Apple shares. The stock of the world's biggest company, ranked by market capitalization, lost 5.2 percent this week, weighing heavily on both the S&P 500 and the Nasdaq. The stock is down 22.4 percent from its September 21 all-time intraday high of $705.07.

Big retailers' report cards
The election and fiscal cliff concerns, which came on the heels of Superstorm Sandy and its devastating effects on many parts of the U.S. Northeast, have captured so much attention that they've overshadowed weakness coming from third-quarter earnings.

With results in from 449 of the S&P 500 companies, third-quarter earnings now are estimated to have declined 0.3 percent from a year ago, which is slightly better than the forecast at the start of the reporting period. Results have been especially weak on the revenue side, however, with just 38 percent of companies beating on sales, Thomson Reuters data showed.

But recent stronger economic data, including a report on Friday showing consumer sentiment at more than a five-year high in early November, suggests that retailers, many of which have yet to report, could be among the stronger performers this earnings period.

Next week, results are expected from such big names as Target, Wal-Mart and Home Depot.

Consumer discretionary companies have outperformed the broader S&P 500 in earnings, with 72 percent of the companies in that sector beating analysts' expectations, compared with 63 percent for the S&P 500 as a whole.

Investors will be paying close attention to those results with the holiday shopping period around the corner, said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey, which oversees about $1 billion in assets.

"It's really the beginning of the Christmas sell season, and I think there's going to be a lot of interest with the outlook for that season and how promotional companies are going to be," Meckler said.

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