Stars aligning for 'serious' US correction

As U.S. stocks ease back from record highs this week, more and more traders see the S&P 500 as overvalued and are pricing in a "serious correction." Expert Jack Bouroudjian said he was most bearish he has ever been on the U.S. stock market.

By Katie Holliday
August 13, 2013
MSN Money

As U.S. stocks ease back from record highs this week, more and more traders see the S&P 500 ($SPX +0.28%) as overvalued and are pricing in a "serious correction."

Jack Bouroudjian, CEO of financial services holding company Bull and Bear Partners, told CNBC's Asia Squawk Box on Tuesday he was the most bearish he has ever been on the U.S. stock market.

"The market is overvalued and we've hit an inflection point. Unless we see some real strong growth numbers coming out of the economy, I'm looking at a 10% correction between now and October. It's time to be very defensive," he said.

Bouroudjian said the market's notional value has become vastly inflated versus the country's total gross domestic product on a historical basis, which is a red flag and could herald an imminent correction.

"Equities have historically traded at a discount to GDP except for two times in the last 50 years," he said. "In the late 1990's we traded at 148% over GDP, and in 2007 we traded at 118% over. Unfortunately, both times were followed by a serious correction. We are now at 110%."

"The time has come to say that the 'easy' money in equities might be behind us unless we see real growth in the GDP numbers and forecasts increase for top line revenue from corporate America over the next couple years," he added.

Bouroudjian's comments underscore the cautious tone surrounding the U.S. stock market that has emerged recently, as industry watchers start to doubt just how long the good times can last. Wall Street traders have also flagged several occurrences of the 'Hindenburg Omen' in the past few weeks, a technical indicator which predicts the potential of a financial market crash.

The S&P 500 index is up over 18% since the start of the year, boosted by more signs of an economic recovery, particularly in the housing market and employment, although it has in the past week eased from record highs seen earlier in the month, due to thin summer trading volumes and continued worries over Fed tapering.

According to Bouroudjian, another trigger point for a market correction could be the appointment of a new Federal Reserve chairman after Ben Bernanke's term expires in January.

"Twice in my investment lifetime, we have changed the Fed chairman. We changed it when (Paul) Volcker changed to (Alan) Greenspan (in 1987) and when Greenspan changed to Bernanke (in 2006). Both times were followed by a serious correction in the market," he said.

"I'm not saying it will happen again for a third time but I am very defensive because of that too," he added.

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