Since June 12th, 2012 expectations continue to remain low according to the Expectations Indicator. With Low Expectations the stock market should remain in a bullish environment. But as discussed in the May 2013 Market Expectation Letter, the recent move higher appears to be forming a bubble top and the Expectations indicator triggered a likely pullback. The message remains the same in this letter while adding what we could expect in the future applying the Expectations Indicator’s objective approach.
When a market forms a bubble it is typically created despite fundamental rational and goes contrary to logic. Since this bubble has been created in a low expectation environment, we can only assume that a pullback should be met with buying support. Once the pullback does ensue in the stock market the buyers that recover it and provide support will be looking for future real earnings to begin to justify that previous high. Future earnings must justify any previous move in the stock market.
For the stock market’s earnings to be justified the process must begin with earnings expectations being raised. Since a bubble is created while defying all logic, then future expectations must be raised to match this unrealistic outlook which creates a high expectations environment hence setting the stage for a large sell off in the equities markets.
The above and below represents the opinion of the author and do not constitute a recommendation to buy or sell any financial products.
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