U.S. stocks market could be on the brink of a pullback given that the Dow Jones Industrial Average has struggled to hit the much-anticipated 20,000 level in such a long time, CEO & Chief Investment Officer of Index Strategy Advisors (ISA) James McDonald tells TheStreet's Real Money.
The Dow has been toying with 20,000 since the second part of December, with some analysts and traders at the time forecasting it would hit it before the end of 2016. It didn't. And although the level is simply an arbitrary threshold, nevertheless it has created expectations.
The problem, according to McDonald, is that these expectations have so far remained unfulfilled.
"I think that already, whether it does or does not, the failure to eclipse Dow 20,000 is worrisome," McDonald says. "The fact we didn't get above it in 2016 with a powerful rally towards the end of the year indicates the market ran out of steam and we could be heading towards a pullback of about 7-10%."
He pointed out that the volatility index, known as the VIX, was up 25% in the final week of last year and this happened in 2014 and 2015, when the VIX was up 30% in the final weeks of these years. In 2015, the market lost 3.4% in the first two weeks and "languished" throughout the year, never rising more than 4%.
Last year, the S&P 500 fell 13% in the first two weeks of the year. "It wasn't until July that the market was able to move higher than its 2015 close. Many investors spent half the year in the red."
Because last year ended on a similar note with the previous two years, and because uncertainty now is higher than in either of these years, the challenges are higher, he said.
One of the biggest uncertainties is what the Donald Trump presidency will mean for the markets -- for instance, the President-Elect's news conference on Wednesday hit health care and pharma stocks while previous statements about infrastructure spending sparked a broader rally in the materials and construction stocks.
Another big uncertainty will be what the Federal Reserve does in the year ahead, with most investors expecting interest rates to increase three times. However, some are predicting four rate rises this year, taking the fed funds rate to between 1.25% and 1.5% next December, a level not seen since October 2008.
"I am looking at a potential correction here," McDonald said.
Head over to Real Money to read about how he thinks investors could shelter their wealth and his main stock picks for the year.