Confidence is building for a January correction of sizable magnitude

Although investors will be reluctant to sell immediately prior to the end of the tax year, the possibility (or probability) of a sizable correction early next year is building.  We have already seen signs of weakness in the market; a consequence of waning investor enthusiasm as stocks are pushed ever higher this year. 

To-date, the S&P 500 has made 48 new, all-time highs in 2014.  The last time this happened was 1929.  

While I have had to wait to reinvest cash for a lot longer than I had hoped, there is no reason to believe that stocks will achieve significant upside beyond the recent highs already set this year.  Valuations remain excessive, with the forward P/E for the S&P 500 at 19.5X; a 40% premium to the historical average (the historical average is 14X).  The questions is when and not if a correction will come.  Given the skittishness of  investors this week, it seems highly likely that a meaningful correction is overdue and is pending.  I would expect to see a correction of at least 15% to 20%, or greater, in the first quarter of 2015 and most likely in January.


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