“Stocks have scored decent gains this year, with the S&P 500 minting 19 records to date. That has prompted some market participants to call for the S&P SPX to hit 2,000 in 2014.
But it’s just when investors start to feel complacent that they should turn around and consider the chance of a correction, according to Jim Paulsen, chief investment strategist at Wells Capital Management.
“Throughout this year, our best guess has been to expect the S&P 500 to reach as high as the 2000ish level sometime this year, but for the stock market to also experience a correction at some point perhaps ending the year about where it began,” he wrote in a note. “Since the stock market is closing in on the 2000ish level, it’s time to consider whether it will simply continue higher throughout this year, or if in the second half, the stock market finally struggles with a more difficult environment?”
Of course, there’s no immediate risk of a correction, he says. But that could all change quickly. He lays out five gauges to watch for that could signal correction pressures in the market:
1. More aggressive stock-market gains: The S&P has traded mostly in a 100 to 125 point range around its uptrend since the beginning of 2013. That’s a “controlled and methodical” upward move, Paulsen said. These gains need to accelerate to a more unsustainable pace in order for the risk of a correction to increase, he said.
- Wells Capital Management
2. Decline in correction calls: Even as stocks have gained this year, stock-market bears have continued to broadcast their views about the likelihood of a correction. While that has slowed somewhat — investors are more comfortable than at any time in this recovery, Paulsen said — there isn’t a broad feeling of euphoria. “For correction risk to truly become elevated, most have to believe a correction is not likely,” he wrote….”
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