S&P Capital IQ's Chief Equity Strategist Warns Of Market Correction (Video)

On October 3, 2014, Sam Stovall, chief equity strategist at S&P Capital IQ, told CNBC that a 5%+ market correction could occur in the first six months of 2015 as the market starts to price in the Fed's initial rate hike, which he believes will occur in the middle of 2015 "at the earliest."
What we got was a better unemployment rate, but at the same time we saw almost 100,000 jobs come off of the search list. Also the wage component was flat, up 0.3%, so a lot of people are still behind the curve when it comes to inflation.

So as a result, I still believe that the Fed will not be raising rates until the middle of next year at the earliest. I do worry, however, that within that six month time frame, history says but does not guarantee that we usually see a topping out pattern where more than 80% of the time we have then fallen into declines of anywhere from 5% plus, with the average being 16%.
He then mentioned potential catalysts that could spark the correction (cracks in the fundamentals of the U.S. economy, a deflationary spiral in Europe, and/or China GDP growth of less than 7.1%).

I agree with Mr. Stovall here. I think the market is in the process of topping out and setting up for a correction of around 20%. This is short term thinking though, so we don't know yet if this decline will be the first corrective wave of the next bear market. But I think the S&P 600 Small Cap ETF is already in a bear market.

Why didn't he mention that the Fed's QE program was ending in October? During this bull cycle, every time the Fed ended QE, or ended its liquidity injections into the banking system via bond purchases, there was a sizable correction (see 2010 and 2011). Just look at the monetary base versus the S&P 500 since the S&P bottomed in 2009. For more in depth research on the stock market, check out my recent posts at Dvolatility Research.
  1. Stock Market Exhaustion Indicators, Divergences Still Warning about Downside (9/28/2014)
  2. S&P 500 vs. US New Highs-New Lows Breadth Indicator Shows Underlying Weakness In Stock Market (Extra Charts, 9/23/2014)
  3. Breadth and Momentum Alerts for SLY, MDY, SPY, QQQ, DIA, IYT (9/14/2014)
Also, beware of the next deflationary death cross during the next bear market. Sometimes you can fight the Fed successfully.
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