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The FTSE 100 Looks Vulnerable To A Correction

We all know that you should never read anything into short-term stock market movements. They tell you as much about long-term trends as a shower of rain says about the climate.

So you shouldn’t draw too many conclusions from the fact that the FTSE 100 (FTSEINDICES: ^FTSE) blue-chip index has just fallen for the third straight session to a two-month low.

Future Shock

You shouldn’t put any faith in stock market predictions either. Almost exactly one year ago, Goldman Sachs predicted the FTSE 100 would hit 7500 within 12 months, a rise of 13%.

On Wednesday the index closed at 6718, way short of that ambitious prediction. Unless the FTSE has a rush of blood in the next couple of weeks, Goldman’s prophecy — like so many before — can be consigned to the rubbish bin.

Calling the market is impossible, no matter who you are. Timing it is even harder. You shouldn’t even try.

Yet something is stopping me putting more money into the market right now.

Bubble Trouble?

It’s not as if the FTSE 100 is overpriced. Currently, it trades at 13.92 times earnings, below the 15 times earnings traditionally seen as fully valued.

It offers an attractive dividend yield as well, at 3.45%.

One year ago the index stood at 6513. It has risen a modest 3% since then, which is hardly the stuff of bubbles. 

Yet I still feel the market looks vulnerable.

Slow And Low

Like many investors, I’m nervous about the upcoming results season. Company earnings have disappointed lately.

Low trading volumes suggest a market lacking in energy and drive. Most activity has been driven by companies buying back their own shares, and retail investors plugging the gap left by the professionals.

Stock market volatility is at record lows. Bond and foreign currency markets also display low volatility and volumes.

Trading desks are twiddling their thumbs. The dog days of summer have come early this year.

Summertime Blues

Some major FTSE 100 blue chips also have the summertime blues. The recovery at insurance giant Aviva seems to have run out of road.

Britain’s biggest retailer Tesco is turning into a retail disaster.

The investment case for Barclays is sinking into the dark pool trading system scandal.

Stormy Weather

Despite that, the FTSE 100 is just 2.2% off its 12 month high of 6878, which it hit in mid-May. I’m actually hoping the summer heat will brew up a storm to drive valuations even lower, and give us all an electric buying opportunity.

We need something to clear the air. And when we get it, I’ll be looking at topping up my exposure in a low-cost FTSE 100 tracker such as iShares Core FTSE 100 Ucits ETF or db x-trackers FTSE 100 Ucits ETF

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Harvey owns shares in Aviva. The Motley Fool owns shares in Tesco.