Optimistic, Pessimistic, Realistic – S&P500 Weekly Chart | Correction 2014 $SPY $QQQ

As we look back at 2013, it can be easily said that it was an unprecedented year.

Instead of building a list of all of the geopolitical and economic events that have occurred in 2013 that were unprecedented, Google trends can make the point in a picture instead of 1000 words.

Economics is about looking forward with what “is” and not what “was” or “should be”.

Therefore lets look at the S&P500 ($SPY) as it stands today – January 18th, 2014. 

 

SP500 Stock Market - Jan-18-14 SPY

 

Pessimistic Case

This case can be summed up in a simple manner: Everything but monetary policy.  A main shift in mindset in 2013 was the realization that it is all about QE.  Every major economy is constantly trying to prop up asset, stock prices, and keep their bonds from exploding higher.

On a technical side, the market has been in overbought territory over 75% of 2013.  A mild correction (38.2%) of the current bull run would take the index to 1400, and a deeper more significant correction (50%) would bring the index near 1260.

From a Austrian Business Cycle Theory perspective we are in the midst of a credit expansion that is on its last straws.  The important point is that everything changes at once.  The switch comes from the realization that ever increasing amounts of stimulus can’t go on forever.  The slowing (and not the stopping) of credit expansion is the trigger, and we have just seen this trigger occur via 10 billion dollar tapering.

The caveat: If the preferred choice of crisis is Hyperinflation then stock market really doesn’t matter any more as can be seen from numerous historical examples.

(Note: Nominal Growth does not equal Real Growth)

Zimbabwe Stock Market Hyperinflation

Source: Venezuela Devalues ~47% – Wealth Cycles

 

Optimistic Case

It is understandable that many people are optimistic.  Similarly, in the Dot Com bubble and in the Housing bubble  people were very optimistic that a new era has dawned.  However, looking at the above hyper-inflated stock market chart, things don’t have to come down.  Therefore, lets look at how this market could be sustained.  Assuming the middle of 2011 was a correction, and since there has not been a significant correction since, we have to expect that for this market to push higher a correction must occur.  A mild correction (38%) would take us back to 1575 and a deeper correction (50%) 1475.

If you are bull, you should be hoping for this correction, because nothing can go straight up forever.  A health correction now would setup later in the year for a push higher.

Realistic Case

Regardless of how you look at it.  A correction is coming. The only question is about degree.  Best case is 14.3% drop.