Where’s the Stock Market Headed…..Quarterly Update #2


Let me start by saying, this is NOT a cyclical bull market, this is definitely a secular bull, which means there is plenty of life left in this market. I believe the reason you’ve seen such a large number of negative pundits from the financial media declare this a top is because this would be the “typical” end of a cyclical bull market. (Small rant: The fear that the financial media drives into the public is disgusting. Listen to price and volume, that will be your confirmation and real voice of reasoning. The returns that main street has missed out on is shameful and if you’re a financial advisor, I hope you haven’t let your clients get caught up in the noise).

Not to toot my own horn, but I’ve been extremely bullish on this rally since the end of 2011, after the minor correction. If I would have been in the Wall Street Consensus year-end price target, I would have been the most bullish, but also the most correct. BOOM! (Note, my past performance is not an indicator of future performance.)

All back-padding aside, we’ve past my original target at the beginning of 2013 of a year-end finish for the S&P of 1,700. Then in August I raised my target to 1,775 due to some near-term consolidation with the belief that the “Santa Claus” rally (November to December, with historically good returns, on average a 3-4% return) would be intact this year following the near-term consolidation/pullback.

As of Friday, the S&P closed 1,798, which is over my year-end target, but is also close to the “evil” psychological number of 1,800. During this rally, we’ve seen anywhere between a 4-10% pullback before each new “round” number was closed above. (Courtesy of Ukarlewitz). I largely believe this will be the case this time around too, even with the market getting overheated the last few weeks (it’s on a seven week winning streak). Although, the scary thing to think about is fund managers are chasing returns to better performance and tend to make one last attempt to meet or beat the market. This could cause this further “parabolic” movement of the market and could lead to a near-term irrational exuberance, only to translate to a poor start to next year.

So, I’m sticking with my year-end target of 1,775. I really believe that we will finish above that, which is always a good thing.

To wrap things up, I’ll list out my reasons/risks for my 1,775 price target at the end of 2013, and my 2,000 price target for year-end 2014. Bottom line, don’t be afraid to put your money to work! Tomorrow I’m sharing my latest positions

Reasons for 1,775 at year-end 2013 (neutral to bearish view, look elsewhere to get same or better returns for the risk being taken):

– Investors are close to being at a historic high of bullishness (approaching 70%, 70% and above has been associated with tops like in 2000 and 2008)

– Also, investors cash on the sidelines is low. So what money are they going to put to work to continue this rally through the year end?

– The put/call ratio is at a typical short-term sell-off level

– The “evil” psychological round number 1,800 and the market’s ability to close above it

Risks  (reasons to finish above 1,775)

– Santa Claus rally historically strong, indicating a possible end of 1820-1830, assuming a 4% increase from 1,760 at the beginning of November

– Breadth is confirming (with 8 of 9 sectors reaching new highs recently). Indicating this is a strong broad-based rally

Reasons to finish at 2,000 for year-end 2014

– Secular bull market with strong, confirming breadth. Remember the last secular bull ran from 1982 to 2000 and consists of multiple cyclical bull markets, each lasting roughly two years. This one started in 2009….

– Favorable rates with QE-infinity. Also a hike in rates usually signals a strong economy, with the stock market usually peaking anywhere between 8 and 41 months after the first rate hike

Risks

– The second year of an election year is usually the weakest of the four year cycle

– On a valuation basis, most measures are at the top-end of their range, which usually indicates a top (TTM PE, margins contracting slightly with no organic growth in sight, trailing and forward PE, 10-year PE (PACE), Tobin’s Q, price to sales……..to name a few 🙂  )

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