HERE IS WHAT TO EXPECT ON THE DOWNSIDE FROM THE MARKET OVER THE NEXT FEW MONTHS
In order to have an accurate assessment of the future, it is important to look back at where we have been. More importantly, this look back can help in understanding the foundation of this current analysis. So let's get started:
- On October 14th, after waving a caution flag since late September, I posted a 1-2 month downside target for the Dow in the 12,300 range.
- On November 16th, the Dow hit what would be its low for the rest of 2012 at 12,471.
- On November 17th, I posted an upside target for the Dow by year end of 13,500.
- While year end was clogged by a Congressional circus, on January 2nd the Dow closed at 13,412.
The market finds itself sitting in a familiar position, once again. That position being the noticeable difficulty the Dow in particular has had with the generational trajectory points that have acted as upside resistance for a number of years now.
The only question the astute observer should have then is the following: Is the market in a position to overcome this resistance or are we due for another case of fear induced declines off these trajectory points?
Although I am long-term bullish and believe 2013 will see the Dow end at record highs above 14,000, those record highs won't be made during the first half of the year as the market is currently suggesting. To achieve such highs early in the year would require an acceleration far above the generational trajectory points. This is something that market simply isn't positioned for at this stage.
The market continues to be in a low volatility uptrend that will hug these trajectory points for a number of years to come. Very similar, in fact, to the 1991-1995.
Over the next several months this reality sets the market up for limited upside from current levels. The "hugging" effect will more than likely see a rolling top take place into March, with an ultimate low for the Dow around 12,800 by the time all is said and done. The upside from these levels over the intermediate term (based on the Dow) is roughly 100 points.
My allocation is completely mechanical in nature so I won't be taking down my 85% long exposure on Tuesday morning as a result of this assessment. I will, however, likely be keeping a lid on long exposure at 85%. Once my trend indicators begin turning, assuming I correct, I will then begin lowering net exposure.
In the meantime, good stock picking will continue to outperform as we begin forming a rolling top over the next few months.
Here is an illustration via a chart of the Dow:
DOW
