Dow Jones Industrial Average: The Market Could Surprise To The Downside In 2014

wall-street-etfMichael Lombardi: The stock market has just put in its worst first-seven-days-of-the-year trading action since 2005, as concern over where key stock indices [Dow Jones Industrial Average (INDEXDJX:.DJI)] will head this year rises. Can the stellar year the stock market had in 2013 continue?

Among those who try to predict where key stock indices will go, Wall Street industry analysts believe that the S&P 500 will rise 4.8% this year, while market strategists believe the S&P 500 will see a decline of 2.3% this year. (Source: FactSet, January 6, 2013.) This tells me that even the professionals can’t figure out which way the market is headed.

On a valuation basis, key stock indices are reaching some dangerous levels. Based on the closing price of the S&P 500 on December 31, the forward 12-month price-to-earnings multiple (P/E) was 15.4. This is the highest forward P/E ratio since May of 2007…and we all know 2007 was the peak for the stock market for five years!

And optimism among stock advisors towards the key stock indices is getting into dangerous territory, too. The indicators I follow suggest the optimism towards key stock indices is at the same level as it was in 2007, while the number of those who are bearish (like me) is at a multi-decade low.

As we move into 2014, I am one of the very few left who are saying key stock indices are dangerously overbought and overpriced.

And if I turn to the economy, the situation looks worse. Four major global economies are in trouble:

In December, China’s manufacturing activity witnessed a shakedown. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) declined to a three-month low in November. New export orders in the country declined for the first time since August, and manufacturing staff declined for the second month. (Source: HSBSC, January 2, 2014.)

India, another well-known economic hub in the global economy, continues to see its manufacturing base weaken. According to the Indian Statistic Ministry, production at Indian factories declined for the second straight month in November. It declined by 2.1% from a year earlier, and production of consumer goods declined by 8.7% in the month. (Source: Reuters, January 10, 2013.)

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