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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Investors Remain Invested But Alert!

Stock-Markets / Stock Markets 2013 Mar 16, 2013 - 06:36 PM GMT

By: Sy_Harding


As the old investing maxim goes ‘the trend is your friend – until it ends’.

The trend of this year’s winter rally has been okay so far. The Dow has gained 15.9% since its November 15 low. Last winter the Dow gained 24.6% from the previous October until the favorable season ended May 1.

However, this winter’s favorable season rally is already making headlines since it has the Dow and S&P 500 back to their levels prior to the 2008-2009 financial melt-down. And having ‘come back’ as in Wall Street’s assurance that ‘the market always comes back’, it finally has investors returning, after four straight years of pulling money out of the market.

The rally should have further to go.

From the technical side, momentum and internal strength indicators remain positive. The consensus of the 35 technical indicators we use in our advisory service remains on the intermediate-term buy signal. From the fundamental side, the economic reports remain mostly positive, and the ‘big-picture’ worries regarding the fiscal cliff, budget deficits, the eurozone debt crisis and so forth, remain subdued.

So it is a time to remain invested.

But it is also a time to be alert and watchful.

As has happened in each of the last three winters, while the significant problems facing the economy are being ignored in the euphoria over the winter rally and the continuing positive economic reports, the problems have not gone away. They will have to come to the forefront again at some point, most probably in the summer months again.

Meanwhile, although it’s only mid-March the market has already gained as much as it averaged in the beginning of each of the last three years before topping out each time into corrections.

The S&P 500 is up 10.0% so far this year.

To begin the year 2010, it gained only 9.2% to its April 23 top before experiencing a 15.6% correction. In 2011 it managed only a gain of 8.4% to its April 29 top before experiencing a 19.4% correction. Last year was better. It gained 13.1% to a March 26 top before experiencing a 10.8% correction.

Perhaps this year it can do as well or even better than last year.

I’m expecting it will, while being especially alert, since nothing has changed in my expectation at last fall’s buy signal that the economy and market will again run into problems once the favorable season ends. And this time it may be a bigger decline than has been experienced in the last three summers.

There are several situations that play into that expectation.

Some are related to historical patterns.

This year, it’s not just the annual pattern of the market making most of its gains in the favorable season of the winter months, and experiencing most of its corrections in the summer months. It’s also that this is the first year of a presidential term, and the history is the tendency for any problems or needed corrections to take place in the first year or two (or both) of the Four-Year Presidential Cycle, and then for all the stops to be pulled out in the last two years to make sure the economy and stock market are recovered again by the time the next presidential election rolls around.

Then there is the fact that over the last 100 years cyclical bull markets have lasted an average of about four years, and this one has already done so. That timing seems to also tie in with the potential for a downturn in the first year of the Four-Year Presidential Cycle.

Then there are those remaining complications for the economy before it can be fully recovered from the 2008 crisis. Those are the significant cuts in government spending and increases in taxes needed to bring the budget deficits under control, both already slated to begin this year, and for the Fed to unload all the bonds and other assets it piled onto its balance sheet in its stimulus efforts, and get its easy-money policies reversed to normalcy.

Already we’re seeing early signs of the likely problems lying ahead from cutbacks in government spending and increased taxes, in Friday’s report that Consumer Confidence fell from 77.6 in February to 71.8 in March, much worse than the consensus forecast of an improvement to 78.0.

Short-term, the Dow has been up for ten straight days, and has again become short-term overbought above its 50-day moving average, and subject to another pull-back from that overbought condition. The last one, a month ago, amounted to only a 3% decline before the rally resumed. But could the next one mark an early end to the favorable season rally this year?

For all these reasons my advice is to remain invested, but have an exit plan in place that will keep the profits, and even potentially transition to going after profits again from the downside in short sales and inverse etf’s.  

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2013 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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