Lately the U.S. stock market has smashed through every obstacle in its path on an up, up and away trajectory, but MarketWatch's Anora Mahmudova
notes there are some red flags for investors to watch out for as 2014 winds down.
Wall Street's consensus forecast return for 2014 was approximately 10 percent — about where stocks are now as they bounce around record levels — but the gains are coming with less volatility than many would have expected.
"It's often said that markets take the stairs up and the elevator down, so strong rallies of the kind we've seen over the past three weeks can make people uncomfortable," Mahmudova wrote.
She suggested a number of technical factors could give the bull market some pause in the short term.
For starters, the current level of the Chicago Board Options Exchange Volatility Index (VIX), a common measure of the aforementioned volatility, has been at an unusually low 13. "The exact 'V' shaped recovery in both the VIX and S&P 500 seems unnatural. Previous pullbacks took much longer to recover from," Mahmudova said.
Next, according to the American Association of Individual Investors, investor sentiment is at a peak level this month, while bearishness, when people think markets will be lower in the next six months, has fallen to its the lowest levels in nine years.
"Such sentiment levels are normally associated with low returns for the next 12 months," she explained.
Also, the S&P 500 closed above its five-day moving average for the 18th straight time on Tuesday, the kind of long upward stretch that usually sets stocks up for at least a modest downturn.
Other areas of potential concern are recent wide swings in Treasury prices that could mean a troubling lack of liquidity, and the bugaboo of uncertainty around when the Federal Reserve will finally tighten on rates.
"We are in uncharted territory. The Fed has a dual mandate — full employment and stable prices. But it also has to start normalizing key interest rates. At this point, markets are unclear as to what the Fed will do and when, creating further uncertainty," Mahmudova wrote.
"While the S&P 500 is climbing the wall of worry, incrementally hitting record highs, known and unknown risks are lurking under the surface."
The CNNMoney Fear & Greed Index shows investor sentiment is getting closer to the "extreme greed" level, according to columnist Paul LaMonica
Some of the reasons why may be the fact Ebola has not turned out to be a worldwide epidemic, ISIS has not had a big impact on the global outlook, central bank policies have helped put a lid on problems, and the mid-term election results were apparently positive for equities, LaMonica said.
On top of all of that, the fourth quarter is traditionally strong for stocks, and bonds have not been in rally mode, making stocks look all the more attractive in comparison.
"Here's hoping that investors don't get too greedy in the coming weeks and months. If they do, we might be looking at more fear (and another big sell-off) shortly after the New Year," he noted.
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