Stock Indices

The S&P 500 just extended its winning streak to seven straight quarters, and it's reasonable to wonder just how long it can continue...[That being said, however,] investors often enjoy a strong wind at their back in the fourth quarter, based on seasonal patterns and stock market history. Will 2014 be different [or will, as history suggests,] investors find a shiny new quarter during the next three months? [This article looks at these patterns to come to a better understanding of how the markets likely will perform for the balance of 2014.]

Our "Barnyard" analysis from a year ago resulted in 6 out of 8 points indicating that the market would be favorable over the next 6-18 months. That has come true, with the S&P 500 up nearly 20% since then. We expect many will be surprised by the latest Barnyard Forecast which we present below.

In our view, the four primary drivers of market valuations are earnings, dividends, interest rates and inflation, of which two stand out above the others as being the most important. We look at each factor and then conclude with what it means for stocks.

The S&P 500 has rallied for three years in a row, without a significant correction. This puzzles many observers who consider equities to be overvalued. Many experts predicted a correction (or worse) this year - after predicting one last year which has not happened - so how high is the S&P 500 valuation, after all?

Is a major top at hand? It is often said that bells do not ring to signal the end of a bull market but if the broad averages were in fact to plummet in the weeks ahead, never forget that bells did indeed ring. This article contains the opinions of three heavyweights in the guru world which are so insightful that any investors who ignore their observations do so at their great peril.

Our financial system is in far worse shape than it was just prior to the financial crash of 2008. The truth is that we are right on schedule for the next great financial crash. You can choose to ignore the warnings if you would like but, ultimately, time will reveal who was right and who was wrong and, unfortunately, I think I will be proven to have been right.

Who knows how long before the Dow Jones Index finally receives a well overdue market enema, but I can assure you of this, when it arrives it will be a VERY messy occasion!

When taking a step back and viewing longer-term gauges, we see warning signs flashing. Many of these readings are in extreme territories, and historically bear markets have occurred from such overbought positioning. We are all cued up for a bear!

With valuations stretched, investors seem to be justifying their stock purchases here with the argument that we have yet to reach the mania of 1999-2000 but history has shown us that there doesn't have to be a bubble for there to be a sharp decline in stocks. As we saw in 2007, it doesn't mean there is no risk of a significant market decline or that valuations are compelling and that investors should be expecting above average long-term returns from here. They should not.

The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle.