Salient to Investors:

The S&P 500 is down 4.1 percent in 2014, its worst start to a year since 2009. Of the S&P 500 companies:

  • Almost 160 were below their 200-day moving average last week, more than any time in 2013
  • 86 stocks set 1-yr highs when the index hit a record on January 15, versus an average of 112 when peaks were reached in Q3, 2013.
  • 460 climbed in 2013
  • 2 stocks have climbed for each stock that has fallen on days when the S&P 500 has risen during the last 7 months versus a ratio of 2.5 for the rest of the bull market

59 percent of NYSE companies traded below their 200-day moving averages on January  29 versus more than 80 percent above in May 2013. Bank of America said when the proportion falls below 60 percent, it is a negative signal. It went below 60 percent in April 1998, three months before the S&P 500 fell 19 percent. In 2007, the percentage of NYSE-listed stocks trading above their averages fell from 65 percent to less than 30 percent in a matter of weeks, and the S&P 500 lost 57 percent from October 2007 through March 2009.

Jason Brady at Thornburg Investment Mgmt said slowing momentum has sometimes been bullish when valuations shrink, but investors should prepare for more months like January because you need new reasons for prices to rise and maybe there are none.

Byron Wien at Blackstone and Robert Doll Jr. at Nuveen Investment say the S&P 500 is due for its first 10 percent drop since 2011.

Brad McMillan at Commonwealth Financial Network is cautious.

John Carey at Pioneer Investment Mgmt said investors are becoming more selective and favoring companies with meaningful growth in earnings prospects for 2014, so expects a more typical market with rougher swings in price in 2014.

James Paulsen at Wells Capital Mgmt said slowing momentum should be expected in a bull market entering its 6th year and after the S&P 500 rise of 30 percent in 2013. Paulsen said this is a refreshing pause and not a correction, and diminishing breadth means investors are acting with more discretion, not turning bearish.

During the 4 biggest bull markets of the last 25 years, peaks in smaller companies, banks and transportation stocks came before the S&P 500 peaked almost 90 percent of the time.

The Russell 2000 Index reached an all-time high on Jan. 22, the S&P 500 Financials Index climbed last month to the highest point since September 2008, and transportation stocks reached a record on January 23.

Economists expect the economy to grow 2.8 percent in 2014 and 3 percent in 2015, versus an average 3.3 percent since 1948.

Christopher Wolfe at Bank of America Merrill Lynch said people have become used to markets going up all the time, and while the market is ripe for a correction, there are fundamental issues as well.

Jeff Saut at Raymond James said breadth has been deteriorating and the equity market has had a heart attack, and does not think the S&P has found a short-term to intermediate-term bottom.

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