*This is from the "Looking Ahead" section of the monthly summary I am currently working on and will be posting tomorrow.
As far as comfortable market environments go, the stock market of 2013 has been a series of mattresses that investors keep rolling over onto as each month passes. The daggers that often times fall from the ceiling when investors are most unsuspecting seem to have been put away as the market has humbled itself before the feet of investors in an expression of sorrow after the torturous decade that was 2000-2010.
To over-think a market of this nature is to misunderstand the market at its essence. There are those who will always be involved in the minutia of understanding every component that creates an uptrend, which invariably leads an investor astray. The problem as it will always stand is that Wall Street is filled with the over-thinking type who has been born and bred into an environment of detailed analysis. That detailed analysis doesn't hold up in dynamic environments. This is the exact reason so few have embraced this uptrend and furthermore, so few have been calling for it over the past few years. There was no piece of traditional analysis available that would have pointed to such an outcome. It was an outlier that investors both amateur and professional are unable to recognize.
If they are unable to recognize the beginning of such a bullish event, how then can market participants depend on these same individuals to provide guidance going forward? It is like an evolutionist being the keynote speaker at a religious conference on the topic of the location of the Garden of Eden. And that is exactly what market participants face going forward in the various voices that are attempting to guide asset allocation here: A group who didn't recognize anything leading up to this point now embracing the bullish movement.
This type of misguided guidance, if you will, creates the various stages of an uptrend. You will notice that during the initial phase of the uptrend meaning the past 12-24 months, there has been very little in the way of downside volatility. There has been very little in the way of a full embrace that could lead to downside volatility. Severe downside volatility occurs only when one of two things occurs:
1. A macroeconomic or geopolitical shock takes place
2. The embrace of an uptrend takes place led by those who were skeptical at the beginning and often times throughout the middle stages of the uptrend.
When those types who were utilizing erroneous analysis to judge a market finally decide to toss their ideas to the side in favor of trend following that is when there is very little in the way of bids left to take on any substantial selling.
While we are not at that point currently, we are certainly much closer to it than we were 12 months or even 6 months ago.
What will create the final throwing in of the towel, so to speak, will be a continued uptrend throughout Q1 and Q2 of 2014. There will be very little in the way of bearish resistance left if the performance of the benchmarks is off to rousing start in 2014. This type of beginning to the year will invariably set the markets up for some spectacular downside volatility as the year continues.
Since this will be the first real downside volatility of a new secular bull market, I will guess that it will be (a) extremely scary (b) extremely short lived. Not a crash in the 1987 sense of the word, but a 1-2 month steep decline that takes the S&P down 10% plus, bringing out the cattle calls for the end of the bull. It will be an extraordinary buying opportunity when it does take place, but abundantly painful for those caught on the wrong side of the tracks in the meantime.
I place a very tiny probability that this occurs during Q1. I place a significant probability that it occurs during Q2. And if it doesn't occur in Q2, Q3 becomes a virtual guarantee. There will simply be too much comfortable money that missed the 2013 bull and is not willing to miss any further upside. This will be money that is guided by the “evolutionist at the religious conference” types who have no reference point for their pseudo-expertise in asset allocation during this bull market. They are simply emotionally driven trend followers curve fitting fundamental data to meet their expectations. These are the most unstable types for sustaining a bull market.
Again, a bullish surge into Q1 2014 brings these types out. By Q2 they will be firmly implanted.
This brings me to the point of this section, my look ahead for December and January, in fact. There will be no deceleration over the next couple of months. December, however, should provide a fair bit more volatility than November did. I expect the first half of December to be a bullish affair, with the second half being much more choppy and likely bearish in nature. December should end positive for the major averages, however, as the market continues to setup for a bullish start to 2014.
January of 2014 should be a tremendously bullish affair. Asset allocation panic galore takes place, with enough momentum to carry throughout Q1. Although I do not expect the same pace of gains in January to take place in February and March. In fact, the best gain for the first half of 2014 in the major averages will likely take place in January.
For the time being a full embrace of all that is a bull market should continue to be the modus operandi for investors. The portfolios near 100% invested stance should be firmly implanted throughout January, which is actually somewhat unusual for my method of investment. It is rare that I remain in a 100% invested position for more than 1-2 months at a time. Three months in a row would be a testament to the extraordinary seasonal circumstances of the period between November-January.
Enjoy your holidays.
