Market Analysis: IAP 2013 Technical Outlook

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2012 was quite an interesting year for investors.  In February, we issued a target range of 13,500-14,000 for the DOW Jones Industrial Average for 2012. We discussed the stock market’s potential pitfalls, which could stall the uptrend that began in March of 2009. With the use of our own research, we were able to get 2012 “right” and not overly reduce risk in the summer, the drop after the election, or the fiscal cliff mess. Each client we serve is unique, but with our internal research we were able to help our clients assume risk (even though the majority of our clients are still very cautious due to the 2008 market). Remember, when a stock market correction starts, do not feed into the media frenzy or, actually, Wall Street research.  Most of what you read is emotion based, and we have found that most decisions made out of emotion tend to not be good ones. Your wealth management goals need to be managed during these times, especially as we believe that we are approaching the apex of this bull market.

As a reminder, a mutual fund manager’s job is typically to beat their index by 1%.  So when the stock market dropped 39% in 2008, a mutual fund manager that was down 38% is considered a very good manager.  Well, in sports the best teams typically have a good defense.  On Wall Street, many advisors fail to understand defense.  In the near future, defense will be very important in terms of managing money….but as we have continued to write…NOT YET.  Where does that leave us for our forecast for 2013, now that the 14,000 we outlined in our last communication is now approaching?

Some important facts to consider in 2013 as we look at the investment climate:

1.  Various international governments are providing liquidity via easing programs to the stock markets. Our Federal Reserve is providing $85 billion in various easing programs. This past week, Japan announced that it is furthering its easing programs. This keeps liquidity in the markets, and is, thus, short term bullish for the stock market. It is this liquidity, from this technician’s perspective, that is causing this stock market to continue higher.

2. Interest rates are at historic lows. The Federal Reserve has promised to keep rates at all-time lows until 2014 (at a minimum). Again, this is bullish for the stock market. Additionally, it is helping the housing market…however, it is far from robust.

3. Taxes are going up, costs of running businesses are rising, and food prices are on the rise. None of these conditions is good for the markets.  The price of oil, so far, is contained. We are seeing signs of inflation, and, in the internal research that we follow, it appears that companies will begin to see slowdowns later in 2013.

4. In the history of the US stock market, most bull market moves (uptrends) last 32 months on average. In March of 2013 we will be on month 48. We are getting very extended without a stock market correction. To our basic belief, the Fed is helping the market, but we are not so sure it is doing anything to help the economy. Eventually, the economy will start to affect stock prices.

5. The overall price to earnings ratio by historical standards is not cheap; stocks are definitely not “on sale”!

6. In each of the last 10 years consecutively we have had a correction sometime in January, February and/or March. Expect that 2013 will be the 11th consecutive year.

Without being too technical in nature, below is our current outline of what we see happening in 2013, as long as the uptrend remains up and the bull market stays intact. This will be our base for future writings in 2013:

Confirming our November forecast, the Dow Jones will reach 14,000 or maybe a little higher in February, and then we suspect a normal correction will occur in late February on into March. The correction will be explained by the media as worries over the debt ceiling, congress’s spending discussions, etc.  Since 2009 we have had nine short term stock market corrections. Short term is defined as a correction that lasts from one to three months. The majority of these corrections have been between 7 and 10% on this current uptrend. The correction after the election was 8.9%.  We stuck to our 13,500-14,000 call for 2012, because our internal research indicated that the bull market was still alive. We do believe that 2013 will most likely have more “swings” than 2012. For this bull market to continue through all of 2013, any correction should be contained in the 7-10% range.

We are currently forecasting the market to get to record highs on the DOW, reaching 15,000 by the 4th quarter of 2013. If we don’t reach this marker by the 4th quarter, then the Bull Market that started in March of 2009 will be over, and we will be in a new bear market. The “Storm” that we write about will be here earlier than we currently think, as our current forecast would call for a bear market to start in late 2013 or early 2014. We will discuss 2014 in more detail as it approaches. For now, we are forecasting a minimum target of 15,000 on the DOW by the 4th quarter of 2013. This will be the base forecast that we work off of in 2013; last year our range was 13,500-14,000.

As always, if we see the bear market approaching sooner than we currently expect, we will promptly notify our clients.