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Why we could see a market correction in February

Talking Numbers

Stocks are the highest percentage of household assets since before the 2007 financial crisis. But is it time to worry?

As a percentage of household assets, stocks are now 28.7%, according to data from the Federal Reserve.

"By no means are the households shunning away from the equities, like they did during the late 1970s and early 1980s," writes financial blogger Tiho on The Short Side of Long.

But, what's interesting to note is that the last time stocks approached 30% of assets, the market peaked and corrected within a year. That, of course, was at the time of the financial crisis five years ago.

To be sure, some of it had to do with rate at which stock prices climbed. In the five years from start of 2003 to the end of 2007, the benchmark S&P 500 index was up nearly 57%. That more or less mirrored the growth rate of the percentage points of equity compared to total assets during that time frame – from north of 20% to shy of 30%.

Since the market's bottom in March 2009, the S&P 500 is up 172.5% but the growth rate of equities as a percentage of household assets has just about doubled, not tripled.

So, does that mean this time is different?

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Jason Rotman, managing partner at Lido Isle Advisors, thinks stocks will head down in the short-term, but not because of an important threshold in equity ownership.

"Just because the equity ownership has matched pre-crash," says Rotman, "[that] doesn’t necessarily mean that's going to happen again for that specific reason. Correlation does not equal causation."

Rotman believes the markets are at the high for the quarter. One reason is because the Fed has begun tapering its bond-buying monetary stimulus program. "If we're going to pull back this stimulus throughout the whole year, that's going to be some serious headwinds for stocks," says Rotman. Another problem for stocks is lackluster earnings, according to Rotman. Nonetheless, he is bullish in the long-term.

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Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, is not too worried about a short-term decline in the S&P 500.

"It's not all rainbows and unicorns out there from either a fundamental or a technical standpoint," says Ross. "But I still see enough in the pure price action of the market and the technical structure to be bullish here. A 2% pullback is nothing. We've become spoiled in this market. You can be bullish but, on the same token, we see pullbacks all the time within the context of that bullish uptrend."

Ross can see the S&P 500 moving towards its 50-day moving average, currently around 1,807 or roughly 2% below its close on Tuesday. A break below 1,800 puts the index at risk for targeting its 150-day moving average which was at 1,723 on Tuesday, or a decline of about 7%.

For Ross, next month could possibly see a decline in the markets.

"November through May, we know that's the best six-month period," says Ross. "That's where all the gains have come in the S&P since 1950 on a cumulative basis. But, within that strong six-month period, February is the weak link."

On average, February is the second-worst performing month behind September for both the S&P 500 and the NASDAQ Composite indices.

"If we're going to get a correction, you want to start to look at February because of that seasonal weakness as a potentially high-probability target," says Ross. "But, I do like the market. I want to buy that pullback. I think we finish higher once again for 2014."

To see more analysis of the S&P 500 by Rotman on the fundamentals and Ross on the technicals, watch the video above.

More from Talking Numbers:

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