It has been a rough start to a new year as all of the gains following the end of the Federal Reserve's flagship "QE-3"campaign have been erased.
As I discussed yesterday, there is currently little concern by the majority of Wall Street analysts that anything is currently wrong with the markets. While earnings estimates are rapidly being guided down, it is likely only a temporary issue due to plunging oil prices. However, not to worry, the economy is set to continue its upward growth trajectory.
Maybe that is the case. But as investors we should always have a watchful eye on the things that could possibly go wrong that could lead to a rapid decline in investment capital. As I stated last week:
"What I find most interesting is that there is very little concern that something could negatively impact the markets. In fact, if anything would actually happen, it will just be a mild 10-15% correction. The problem is that historically, such outcomes have only been found in "rarified air." Could this time be different? Sure, anything is possible. However, as an investor my primary concern should be the protection of my limited investment capital against unmitigated destruction."
This week's reading list is a variety of opinions on the state of the markets and the risk that currently prevail. This is of keen interest to me as an "almost fully invested bear."
1) Market Madness Started With End Of QE by Jeff Cox via CNBC
"For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington.
Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring.
Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding."
Read Also: Bullish For The Right Reasons by First Trust
2) Markets Are Freaking Out For No Good Reason by Matt O'Brien via The Washington Post
"Markets might be efficient, but, boy, can they be stupid sometimes.
The latest brouhaha came, like it did a few months ago, over a surprisingly bad retail number. Markets expected it to fall 0.2 percent in December, but in reality it fell 0.9 percent.
Cue the freakout: The Dow was down 300 points at 1:30, falling about 1.75 percent. Bond yields on U.S. Treasury debt are falling, too, a sign that people are hunting for safety."
Read Also: These 6 Gurus Are (Mostly) Bullish For 2015 by Howard Gold via MarketWatch
3) Navigating High Stock Valuations In A Deflationary World by GaveKal Capital Blog
"As we highlighted yesterday, stock valuations jumped again in December to another cycle high. As the first two charts show, the cyclically adjusted P/E multiple has only been higher on several occasions and the median stock is trading at a record price to cash flow multiple as far back as we have data. These high valuation levels leave stocks at risk.
High stock valuations and growing signs of deflation pose all sorts of risks to portfolios, so an important question is what kind of asset allocation is likely to mitigate some of those risks?"
Read Also: The Most NOT Hated Bull Market by Meb Faber via Meb Faber Research
4) How To Defend Your Money From A Bear Market by Michael Sincere via MarketWatch
"Skeptics are ridiculed as “naysayers,” “permabears” or “doom and gloomers.” As the bull market goes higher, many investors think that maybe it really is different this time. Maybe central banks have the power to keep markets levitated indefinitely.
Meanwhile, the bubble gets bigger and bigger, until complacent investors accept the bubble as the “new norm.” Nowadays, uber-bulls believe this market is unstoppable, while some experts have made predictions of Dow 20,000 in 2015."
Read Also: The Stock Markets Dilemma by Jeffrey Snider via Alhambra Partners
5) The One Chart Bear Case For US Stocks by Dan McCrum via Financial Times
"Tuesday’s presentation was a variation on that theme, with the investor warning that while lower oil prices help the US economy, watch out for the impact of the shale boom deflating. A few choice slides below, starting with one to keep in mind on the US stock market.
We always hesitate to use the word unprecedented. Still, another year of gains for US stocks would be the seventh in a row and, well…"
Read Also: Jeff Gundlach Presentation via Business Insider
Bonus Read: Perma Bull Throws In The Towel by Zerohedge
"As the bull market goes on, people who take great risks achieve great rewards, seemingly without punishment. It's like crime without punishment or sex without sin." - Ron Chernow
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of "Street Talk with Lance Roberts", Chief Editor of "The X-Factor" Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In.