Bull Market Not Over, But A Correction May Be on The Horizon

Submitted by Abby Joseph at Profit Confidential as part of our contributors program.

I was watching CNBC Asia two nights ago and marveled at the talk of how well Japan was doing, noting the obvious enthusiasm for the record level of the stock market.

And just like it was back in late 1999, there are more bulls coming out on Wall Street and saying how high the Dow could run. I have heard talk of the Dow at 20,000 and the S&P 500 at 1,800.

Then there’s the recent cheerleading on the stock market from perennial bull Jeremy Siegel from the Wharton School of business, who thinks the Dow could trade at 17,000 this year. (Source: Navarro, B.J., “Jeremy Siegel Still Sees Dow 17,000,” CNBC, May 31, 2013.)

With all of this bullishness, I’m now thinking of an exit strategy. Everyone who thinks this stock market is going higher without some sort of correction may be surprised.

The way I see it is the stock market is vulnerable to selling, but as I said a few days ago, stocks will likely end up higher by the year’s end, as long as the Fed continues to offer easy and cheap money. (Read “How the Stock Market Staged a Rally and Not a Meltdown This May.”)

Never mind the speculation surrounding the Federal Reserve cutting its bond buying at the upcoming Federal Open Market Committee (FOMC) meeting on June 14 and 15; as long as the jobs picture remains fragile, the Fed will likely refrain from doing so until there are stronger economic signals.

The ADP Employment Change was weaker than expected at 135,000 new jobs in May (source: Automatic Data Processing web site, last accessed June 6, 2013), below the Briefing.com estimate of 140,000. If the non-farm reading today also comes in subpar, then I believe the Fed may think hard about cutting stimulus at this juncture.

Of course, you also have to worry about the bubble-like situation in the Japanese stock market. Yes, I say the Nikkei is in a bubble and may be set to burst. The reality is that the benchmark Nikkei 225 is way overvalued, and it fell another 3.8% on Wednesday. With the decline, the overhyped index is now down 15.7% from its high on May 22.

Apparently, Japan’s Prime Minister and the mastermind behind the country’s massive capital injection, Shinzo Abe, failed to discuss the Japanese economy in detail at a keynote speech. Perhaps Mr. Abe has something he wants to avoid talking about.

While the Japanese situation is 10,000 miles away, the ramifications of a major sell-off there would likely trigger a correction in other global stock markets.

The bull market is not done, but I’m seeing an upcoming opportunity to accumulate stocks.