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'Common sense' says look out for a market drop


What if stocks hit record highs and no one really cared?

That’s been the story of 2014 thus far and it seems unlikely to change during this holiday shortened week. For the record the mark didn’t close at all time highs on Friday, having sold off for several days while America’s attention was focused on the World Cup. Regardless, with better than 7% gains on the S&P 500 (^GSPC) (including dividends) already in the books this year Hugh Johnson of HJ Advisors says it’s time to play some defense.

“After the kind of move we had to the upside in 2013 and for that matter even a pretty strong since early April just common sense alone says we might be a little bit pricey or overvalued. It’s going to be tough to make new commitments to the market” Johnson comments in the attached clip.

It’s a compelling argument but common sense has kept plenty of people out of the stock market entirely since 2009. Through a confluence of economic resilience, an accommodative (manipulative?) monetary policy and economic growth the stock market has been on a slow-boil higher all year. At least thus far every head fake and dip has been a buying opportunity. Those betting otherwise have been taken out in a box.

That said Johnson is looking at the near term and sees plenty of reasons for caution. The situation in Iraq continues to erode, economic growth has been non-existant, inflation is perking up and, again, there’s that nagging sense that stocks are simply due for a pullback if not outright correction.

With resistance dead ahead and more than 20% gains over the last 52-weeks Johnson sees the potential for a pullback of 3%, at least.

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