Stock Market is Due for a 15-20% Correction – Here's Why

Lorimer Wilson June 10, 2011 1 Comment 4,280 Views

Corporate America has been flying high since the recession, barely looking back since March 2009. The 70% rally in the S&P 500 in just under 2 years has been astounding to say the least – but are we really in 70% better shape as a nation since March 2009? No way! The dollar has continued to decrease in value, investments that feed off fear like gold and silver have soared….housing prices are still as low as in 2009, when they “crashed.” The signs of a major market correction…[are] right in front of us… no one seems to notice [but I do]. I believe we could soon experience a market correction of from 15% to 20%. Let me explain why. Words: 913

So says Galileo Russell (www.princeofwallst.wordpress.com) in an article*which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Russell goes on to say:

Many Large Cap Stocks Have Very High Growth Expectations

Financial analysts as a whole seem to have come to the consensus that the end of 2011, through 2012, will be excellent times for American companies all around. [Many of] America’s favorite stocks like Apple, Cisco, J.P. Morgan, Amazone, General Electric, Alcoa, and Netflix have projected growth numbers above 10% from 2011 to 2012. No wonder everyone has been so bullish on the market for the past year. With future growth expectations as high as they are everything looks dirt cheap at today’s prices.

Many Momentum Stocks Have Extremely High P/E Ratios

Along with making bold predictions for established companies, a new breed of ridiculously valued momentum stocks have taken over the market. I’m talking about Open Table, lululemon, Ulta Salon, Cosmetics & Fragrance, Inc., LinkedIn, Salesforce.com, Chipotle Mexican Grill, MercadoLibre, Inc. – and the list goes on forever. All of these stocks are trading at 50+ trailing P/E ratios if not 70 or more. Not only that but even when you factor in the outstanding 40% growth rates these stocks are given you’d have to hold on to your investment for 3 years for the earnings to catch up the stock for a normal valuation.

S&P 500 Continues to be Overbought

The market is down over 4% so far in June and it seems as if everyone is turning into a bear. It’s been clear for a while [that] the chart of the S&P 500 has been overbought throughout this run over the past 2 years. Now the question is whether we are in for a normal pullback or steep market correction.

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Why A Steep Market Correction is Ahead

I believe we could have a very steep market correction ahead of [from] 15-20%. Let me explain why.

With outlooks as good as they are for America’s leaders Q2 earnings can only do one thing, and that’s disappoint. Q1 was phenomenal, with the majority of S&P companies blowing out estimates and creating a brighter future outlook. In other words, earning surprises have become the norm. In my opinion if we see anything less in Q2 the market will react very poorly….
The dollar is almost at its weakest point ever [and] if this trend continues the ultimate result will be the U.S. economy turning from outsourcing hard labor to outsourcing management positions…The Fed has been pumping massive amounts of money into the economy [since] 2009 in an attempt to stifle its decline, stimulate growth [and cause a] turn-around in consumer spending [but,] as one would reason [using] basic supply and demand principles, this has caused a drop in the value of the dollar. [In fact,] the opposite is happening. Our debt, now over $14 trillion, continues to increase and is showing no signs of slowing down…
As the value of the dollar decreases our bonds look weaker…to foreign governments. As a consequence, to get them to buy our debt, we [will eventually have to] raise interest rates…then the government will also be…forcing itself towards higher inflation…

How to Invest During These Times

Although my article has a very negative outlook on the U.S. market it is excellent [time] for traders… A potential short of the SPY and a long of GLD or SLV could be an excellent move at today’s market levels. If you [can accept greater] risk then shorting the overvalued momentum stocks would be another [excellent] way to gain from an ugly year or two in the markets.

*http://seekingalpha.com/article/273702-why-we-are-due-for-a-brutally-ugly-2011-2012?source=email_macro_view

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Editor’s Note:

The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

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Stock Market is Due for a 15-20% Correction – Here's Why

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