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Bill Fleckenstein is not ready to call the top for the market just yet. But pointing to the S&P 500's valuation, he says that once stocks do start to fall, the decline could prove extremely painful.
"The [price-to-earnings ratio] is 16, 17 times earnings," Fleckenstein said on Tuesday's episode of "Futures Now." "Why would you pay 16 times for an S&P company? I don't care about where rates are, because rates are artificially suppressed. Why isn't that worth 11 or 12 times? Just by that analysis, you'd be down by a quarter or 30 percent. So there's a huge amount of downside."
For Fleckenstein, a noted short seller who is famous for making money in the 2008 crash, the Federal Reserve's quantitative easing program has led investors to badly misprice stocks.
The Fed "printing money does not make the economy work, but it sometimes makes stocks go wild," Fleckenstein said. "The reason the stock market did well last year is because the Fed printed $1 trillion."
And as long as the Fed continues its quantitative easing program, and investors continue to have faith in the Fed, "it's not an environment in which you can put together a logical argument to be short and stay short," he said.
Yet if the Fed tapers, the story line could change—particularly if the Fed is forced to increase its QE program after cutting it.
The Federal Open Market Committee is meeting this week, and many expect the Fed to taper its quantiative easing program by another $10 billion, bringing the total amount of QE down to $65 billion per month. And while tapering seemed to be atop nearly everyone's list of concerns in 2013, traders expect the market reaction to the announcement of a further Fed taper to be muted.
"I do believe the Fed intends to announce a continuation of the taper next week, and I don't think it will be particularly shocking to the markets," Jim Iuorio of TJM Institutional Services said Friday, reflecting the views of many traders.
The two-day meeting starts Tuesday. A statement will be released Wednesday, followed by a news conference. This will be the final meeting chaired by Ben Bernanke, with Janet Yellen taking over at the beginning of February.
The Fed announced its first reduction of asset purchases in its December meeting, following months of speculation about when it would start to wind down its $85 billion program. The Fed also noted in December that it would watch employment data closely as it decides upon the future of its asset purchases. Although the December employment report showed that the economy created only 74,000 jobs, economists generally expect the Fed to cut down purchases by another $10 billion anyway.
(Read more: The Fed is trapped; buy gold now, Peter Schiff says)
Gold is starting 2014 on a high note, rising 4 percent after finishing off the worst year since 1981. And with bullion now trading at two-month highs, traders say a short squeeze could be imminent.
"In a heavily shorted market, you'll get to a level where people can no longer stand the pain, and then everybody rushes to the exit at once, causing the move to feed off of itself," said Jim Iuorio of TJM Institutional Services.
According to the Jan. 14 Commitments of Traders report from the Commodity Futures Trading Commission, short bets on gold rose by 2.9 during the previous seven days, adding to the already-sizable short positioning in the market.
Being short gold in 2013 was a phenomenal trade, as the metal fell nearly 30 percent. But at this point, gold bears may be overplaying their hand.
"There are a significant people out there who really believe the gold price should be much lower, and you have a record amount of shorts in the market" said Mihir Dange, a gold options trader with Grafite Capital. "But usually record shorts and a rally should lead to some sort of squeeze somewhere."
Natural gas has screamed higher this week, as cold weather has led the commodity to rise over 10 percent in three trading sessions, bringing it to the highest level since June 2011. And some energy traders say there's still more room to the upside.
"This is a classic supply-and-demand move," said Anthony Grisanti of GRZ Energy. "All the cold has boosted demand, but we're about 15 percent below last year's supply at this time. So I still expect these prices to rise because I expect the cold to continue through the rest of the month."
A weekly inventory report released on Thursday showed a 107 billion cubic foot withdrawal, about in line with market expectations. Still, inventories are still far below the five-year average for this time of year.
"Yes, we're going to have cold weather—but at the same time, we're going to have to replenish the inventories," Jeff Kilburg of KKM Financial said Thursday on CNBC's "Futures Now." "So I think there's going to be demand for longer, and therefore, natural gas will stay elevated."
Peter Schiff has a warning for gold investors: Don't fear the Fed.
"Gold has already priced in whatever taper is coming," Schiff, CEO and chief global strategist of Euro Pacific Capital, told CNBC. "If anything, it has overpriced it."
Gold is slightly lower Tuesday on the heels of a stronger dollar and a report from Jon Hilsenrath of The Wall Street Journal suggesting that the Fed will continue to reduce—or taper—its bond-purchasing program when it meets next week. The prospect of a Fed exit has terrified gold bugs and led to bullion's worst annual performance in 2013 since the end of the Clinton administration.
But those fears are misplaced, according to Schiff. As he sees it, the Fed has no viable exit strategy, and once the market realizes that, gold could become the hottest trade of the year.
"If the Fed starts tapering, the whole economy will tank," Schiff said on "Futures Now." "Stocks will suffer, the dollar will collapse, and all the Fed's stimulative programs ... since 2008 will have been for nothing. That's why they have to keep printing money. They can't stop. And eventually, that will make gold a very attractive investment."
In other words, the Fed is trapped in a vicious cycle of easy money, unable to fully revive the economy yet hesitant to end the very programs that it hoped would do just that.
Of course, Schiff has made similar claims in the past two years, none of which have worked out particularly well. And he remains noncommittal about the exact timing of gold's possible accent.
But gold remains his top investment choice, Schiff said, adding, "It's a no-brainer."
Gold has enjoyed a strong start to 2014, rising more than 2 percent in the first few weeks of the year. And after closing out the worst year since 1981, gold should continue to stage a mild rebound throughout the rest of the year, some traders and analysts say.
"I'd be careful to say just because one year's bad, the next year's good," said Michael Dudas, precious metals and mining analyst at Sterne Agee. But "the liquidation out of ETFs and out of the hedge funds in gold in 2013—I can't see that happening again given global fundamentals where we are today. … There's a lot more positive than negative to support gold in 2014."
(Read more: Gold poised to snap 3-week rally on economic outlook)
Dudas believes the cost of production for gold and Asian physical demand present encouraging signs, but argues that "the real catalyst this year for a significant move in gold is that we get any monetary velocity back into the marketplace, which we have not really seen since the crash of 2008. I think that fundamentally, that could be the big ticket."
In addition, the fact that gold has outperformed equities thus far doesn't hurt.
In gold, "the sentiment has been so awful, so bad," and yet "the fact that the equities don't seem like they're off to a 30-percent-up 2014 has really had gold holding here pretty nicely. So I do think we could grind higher from such poor sentiment levels," Dudas said Thursday on CNBC's "Futures Now."
(Read more: Byron Wien: 10 percent correction looms–here's why)
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