At this point it would be foolish to doubt this rally. It has blown right through a number of supposedly catastrophic events – sequestration, ongoing European debt concerns, a decline in U.S. GDP growth,Fed “tapering.” Investors have tuned it all out, pushing stocks to new record highs on almost a weekly basis.
If this recent pullback reaches 6%, then there might be something to this correction. Stocks haven’t pulled back more than 5.7% since November 2011. It will happen eventually. No rally lasts forever. And with the S&P 500 trading at close to 17 times forward earnings, it’s much higher than its 10-year (13.8) and 15-year (15.8) averages.
The valuation isn’t close to the crazy forward P/Es around the turn of the century, when stocks were trading as high as 25 times forward earnings. But it’s higher than it’s been at any point in the last decade. That’s difficult to sustain.
I wouldn’t go selling off all your stocks just yet, though. A few down days is nothing to be terribly concerned about. Chances are, this is just another mini speed bump slowing what has been a virtually unstoppable rally.
Sooner or later, though, a correction is coming. When it happens, you’ll know it.
This article is brought to you courtesy of Chris Preston from Wyatt Research.