The Dow Jones Industrial Average recently made a high of 16,174. The market now appears to be in a minor correction. We forecasted that the market could reach the 15,700-16,300 level on the DOW Jones prior to the end of this bull market. With everything that is going on in Washington, it is hard to believe that we actually have reached this level. Is the rally over? Has the stock market reached a final target?
In short, I believe the answer is no. The basis for my forecast is using our internal technical research to help understand how high the market could go based on the current market conditions. It is my basis that this is a Federal Reserve Bubble, and the market is solely responding to the monetary policy of the Federal Reserve. It is my opinion that this market is moving higher due to the Federal Reserve supplying $85 Billion a month to the US credit markets. I have communicated that I believe that the stock market will continue higher until March of 2014, and then a bear market will follow. (A bear market is defined by a minimum 20% drop in stock prices.)
The Federal Reserve indicated that they would “taper” its easing policy this past summer. When it made that announcement the DOW Jones fell over 300 points in one day. This past fall, it retracted its statements and indicated that there would be no tapering in the short term. This announcement change can have more upside implications to the market. The months of December and January will determine if I need to modify the March 2014 view. I will not modify my view that a bear market is coming, but I will have to modify how much higher this market can go first. It is rare for a bull market to last longer than 60 months without a significant correction (March 2014 will be 60 months). However we cannot underestimate what Quantitative Easing can do in terms of “extending the market”. So here are two scenarios that I believe could happen:
The March projected Top scenario: The stock market experiences selling through the months of December and January of 5-8% drop in equities, followed by one last strong rally back up to our recent high and reaching a new high of around 16,300-16,500. Then the stock market slowly turns down over the 2014-2015 period.
The more Bullish scenario: The Federal Reserve’s easing policy continues to have an effect on stocks. There is no significant correction in December and January, and the DOW reaches 17,000 by March. If this occurs, it is quite possible (probable) that the stock market continues higher through most of 2014.
I read articles every day about very astute investors who are selling stocks and reducing risk. Fear causes markets to drift higher; we typically need to be more cautious when the majority of people are less worried about the markets.
In January I will issue our 2014 forecast. By that time, the Federal Reserve will have made its mid-December announcement about any tapering of the easing policy, and Janet Yellen will have taken her seat as the new Chair of the Board of Governors of the Federal Reserve System. Bernanke will be stepping down; will the bull market leave with him?