Equity markets are off to a quick start for 2013. The month of January has been particularly strong with the S&P 500 posting gains of 5.04% for the month. Historically, the month of January has been a great barometer for projecting equity performance for the end of the year. According to the Stock Traders Almanac, the barometer has only been wrong 7 times since 1950. The last time this indicator failed was in 2001 when a 3.5% gain in January ended up in a 13% decline by year end.
The continuos expansion of the monetary base (ie money printing) by the Federal Reserve has been fueling equity markets in an effort to stimulate growth in the broader economy. Despite the recent fall in GDP of 0.1% for the fourth quarter equity markets continue to push higher. This was the first negative GDP reading since the recession of 2007-09. The question now becomes will money printing be enough to get the broader economy back on track and continue to bolster equity prices or will US fiscal and monetary concerns derail the positive expectations?
Recently there have been a number of noted market strategists that have warned that stock market prices may be getting ahead of themselves. With the S&P 500 breaching 1500 and the Dow Jones above 14000 some investors believe this may trigger the next leg of the 2013 bull market. However, two market strategist with a history of prescient market calls Doug Kass and Marc Faber (more below) are warning that we may be at or very near the highs for 2013. The charts below illustrate the inflection points that will define either the begining of the selloff or the start of the next bull run.
The daily S&P 500 chart above identifies near term resistance between 1515-1520. The RSI is also indicating an overbought market, last time the RSI was at these levels the S&P 500 sold off approximately 40 pts. A correction towards the 21 EMA and previous resistance at the 1460 region would be a healthy pull back while still maintaining the overall uptrend. Below is a weekly chart of the S&P 500. If the market can break above 1520 we could see an accelerated move towards the all time highs near 1585.
The Nasdaq 100 shown below has been underperforming recently. It is looking weak and may be in trouble below 2720 where the right shoulder may be confirmed of a potential larger head and shoulders formation. A close above 2760 should propel the market to 2800. The potential head and shoulders pattern and the formation of the right shoulder would still be valid even if the market manages to reach 2800, this is where the left shoulder was formed.
The Volatility Index is still showing investor complacency. Caution is warranted and long hedges appear appropriate and affordable at these levels.
In the video below Doug Kass expands on his thesis why the market may be nearing a top. If you haven't followed his analysis and market calls in the past you should look into his work. His main concerns are as follows.
- Fiscal and monetary policy is unsustainable and diminishing in strength
- Slowing growth and rising rates to hurt corporate profitability
- Market may be putting in YEARLY high
- Fair Value of S&P 500 is 6-7% below current prices
Marc Faber outlines his concerns for the market.
- Investor euphoria is building up
- Overly optimistic earnings growth
- Geo-political issues heating up globally
- Technology particularly vulnerable
- Potential for blow off top remains in the short term
Last but not least a piece from Kyle Bass outlining his views on money printing, inflation and where the market may be headed.
- Expansion of monetary base (ie money printing) to fuel further equity advances
- Inflation expectations to errode nominal gains in equities
- Declining purchasing power