The market has not built enough time up here to sustain a long term rally. But with more time at lower levels then accumulation can develop and the bull market can continue. However, from current levels the market is not on sturdy ground. The market is stretched up at 165 and support is down at 149 and implies a downside risk of 10%. The time of the last consolidation was 12 weeks and we are in the 12th week of the rally. So, time has run out. Since the market has needed 20 weeks of accumulation before each previous rally, it is to me that it only took 12 weeks in this latest accumulation.
The factors driving the market until now have been clear (stock buybacks, growth, Fed driven low interest rates, equity fund inflows), but we are ahead of rational long term valuations and I would not recommend committing new funds to this market.
I am concerned about several areas: Corporate leverage is up. Valuations are stretched as stocks have been top performers. Margin buying is at record levels. Investors are optimistic again. Analysts seem unanimous in forecasting higher prices. Demographic trends are pointing down for several years, implying weak economic growth (See Harry Dent's newest book, just released this week). This is a great time to do the opposite of the analysts forecasting another 10%-15% gains and walk away instead.
A great alternative will be picking individual stocks and getting back in when prices are lower. I'm happy to take the risk of avoiding any further upside to this market. For now, sit in cash and if you have knowledge about put and call options, you can utilize strategies to give away the upside (selling call options) return in exchange for protecting against a move to the downside (buying put options).
Happy New Year to all and here is to a successful 2014 at TradingView!
Tim Jan 9, 2014 12:10PM EST
The final flush down in gold is happening with gold under $1200 as the ultimate "fight against money printing" seems to be falling on its face. The believers that Gold would save their portfolios are being truly challenged because as we all know, burying your head in the sand (which gold investing can be likened to) is not an investing strategy. Commodity prices are tumbling across the board with ample supplies of corn, wheat, soybeans together with crude oil, heating oil, and even natural gas, are keeping inflation at bay. Even though employment is gaining, apparently it is only in people aged 55 and up that have found work since the recession started and magically, their wages have not risen.
So, we still face a demographic headwind of people retiring who don't spend as much as they used to and will continue to spend less each year, keeping a cap on the US economy. There simply aren't enough new spenders to keep the game of musical chairs going. We simply won't keep trading up from the condo to a small single family house, to a much larger single family house, to the mcmansion. That game is over. The economy won't be sustained on massive spending on houses anymore, we all know this. The economy will grow on getting more transactions taxed that have heretofore been untaxed. Enough waxing on.
I am thinking that year end could be lower than I forecast, but at this point let's just take one day at a time. So far, so good for this year. I don't know what will trigger investors to start to sell stocks and I don't know what they will buy. Cash is still a wasting asset, note the negative interest rates in various places. We all just need to realize that deflation is still the bigger risk and emerging markets may be the beneficiary as they are growing. So, I think the trade will be "out of developed markets" and into "emerging markets" for the next year (as a whole - details to follow)...