Before I get to what I think will happen in 2013, I want to vent about financial media for a moment. If you want to skip this, go to NOW FOR THE REAL POST below this commentary.
This post may seem a little angry, but I think I am somewhat fed-up with the short-run financial news networks of late, which is why for the most part, I have totally stopped watching them (save for listening to Bloomberg Radio) except when people I want to see being interviewed speak. We are at somewhat of a crossroads in market action in the USA and the world, as the statists continue to tinker with economic activity without a clue of unintended consequences. The financial media (starved for viewers as many are) attempt to draw in traders of all stripes to grab perceived short-term gain, but in the end, leave them with little knowledge for which to help them make either short-term or long-term decisions. Full disclosure, I dislike both CNBC and Fox Business (the real cupie-doll network). I tolerate as much of Bloomberg as possible, though they are the most fact-based of any of them. They are run by left-wing owners and dole out largely left-wing opinion pieces, but I am amazed at how freely they let their guests speak and do not try to quell honest opinion. That cannot be said of CNBC. I find Fox Business to largely be fluff, so I seldom even dial it in.
Most of the crap you watch on CNBC is designed to make short-term bets on your longer-term future and is totally unsuited for most investors, or even serious traders for that matter. The problem now is that most investors have little money and cannot afford to take large risks after having been blown out twice by the tech bubble and the banking/housing meltdown. They do not want to watch tie-wearing greasy-haired myrmidons tell them about 20-handle S&P 500 rallies that may or may not exist. Many boomers have little to spare and the 20-and-even-30-somethings are sitting at home in their parents basements underemployed or unemployed. Once the younger folks get going, they need a little advice as to how to hold onto a solid footing for the future, no matter how badly government, private investment banking, mortgage banking, and shadow banking have destroyed their ability to hold onto wealth, let alone build it. I will try to address that a bit shortly.
NOW FOR THE REAL POST:
About 5 days ago, I saw this post in Real Clear Markets, and I was a little surprised, because I have followed and admired Jon Najarian for years. The only thing that bothered me was that I have been investing money about 8 years longer than he has which ( yes, you baby-boomer haters out there), makes ME feel old. He said in this video that after 31 years he was out of the market! Well, I guess he was four days ahead of me, because after 39 years in the stock market, I went totally into cash. DO NOT FOLLOW ME IN THIS BECAUSE I WILL EXPLAIN MY RATIONALE LATER.
I could (and probably should) write a book on the topic I have about forecasting market action in the coming years, but I decided to:
1) Give some quick range forecasts for a few of the major U.S. indexes
2) Try to continue my discussion of why the old tomes of “buy and hold” and “value-based” investing have been somewhat broken and may be so for some time. I think both ultra-bulls and even ultra-bears are wrong right now, though I do believe there is significant downside risk from any number of economic outcomes.
If someone wants me to address sectors to study for trading opportunities, I can do so later in a detailed post, but I have a lot to cover in a short post. You will have to request it though, so please leave a comment if you want that. In the future, because of limits in my time to write, I will take votes for who wants to see posts. I got 10 votes on Stocktwits last week, so by my own rule of thumb that means about 100 people I know want to read it, so I write this post today.
Here is the list of indices:
$SPX: If you wish to read what I said about the $SPX last year, read here. The major reason, in my opinion, that we did not go to the lowest target levels I mentioned last year was that the Federal Reserve announced Q.E.4ever...( or at least quantitative easing until 2015 or unemployment reaches 6.5%). That continued the practice of near zero interest rates which force return hungry investors (whether they can afford the risk or not) to move into risk assets like U.S. and foreign equities to get a decent return. As one can see, the $SPX closed near the top of the range I mentioned last year. Were it not for quantitative easing, it is hard to say if we would have held up at the these levels, but the Fed did what they did to try to stabilize markets in the short run, as that saves politicians skins and keeps the investing masses placated.
What could happen in terms or ranges this year? What may be disconcerting for bulls in 2013 could be the fact that monthly momentum in my model turned bearish last month, but volume was a bit lacking. Look at this weekly chart for a bullish case for the $SPX. We hit the 0.886 Fibonacci retracement of the distance between the October 2007 high and the March 2009 low last month at 1474.51. If in the short run all the folderol about avoiding the fiscal cliff disappears and mutual funds and sovereigns go all in for the near term, we could easily see 1578.95, which would set a tiny new high in the $SPX. It is not impossible to even see a test of 1695.15 on a technical extension, though, as I said last year and I will emphasize again, we will have given up much of the return in the $SPX for the next couple of years afterward should we do that. If we are at a peak (either the 0.886 retracement or the right shoulder of the head and shoulders pattern, we could easily see a retracement back to between 1227.92 to 1219.80. It would take something truly earth-shattering to dive markets back under the 1010.91 low of 2010, but in the uncertain economic and political climate we live in, nothing is impossible. I do believe, based on my best analysis, that we will contain most of the action between 1578.95 and 1219.80, with a close perhaps at best of 1520 and a close at worst the 0.382 retracement of this last up move from October 2011 to September 2012 of 1322.53 for 2013. I am just not sure how many bullets the Fed has left to shoot, and I personally am not betting on any real fiscal restraint by this Congress or this President, which puts the credit rating of the United States at risk of another downgrade. Does that mean the market is going straight to hell if there is a downgrade? No, but it may begin to tie the hands of the Fed on rates should commodity prices continue to rise and our ability to borrow becomes more difficult.
QQQ: I was going to devote some time to valuation issues in the QQQ, but instead I am only going to show technical patterns here and save that thunder for another session. Take a look at the monthly chart of the QQQs. Note that the 0.25 retracement is at roughly 73.03 and that there is price structure resistance at 74.78. Those are likely practical limits for price highs in the QQQs for 2012. Take a look a the bullish case for QQQs. Note that confluence for a bullish QQQ AB=CD pattern hits right at 73.03. So far, weekly momentum is still positive for QQQ, so this is not an unrealistic outcome. On the other hand, monthly momentum is negative still, and it is possible that a bearish Gartley pattern could be created very near the 68.60 level. If that were to show up, all the accoutrements of a real head and shoulders top would be in place. If so, we could see a retest of the 60.04 lows. As of yet, the weekly bull momentum pattern is holding up. If I had to guess, I would assume the highest that the QQQ could hit this year would be close to 73.03 level (or about a (73.03 -65.1301/65.1301)= 12.1% gain for the year AT BEST). Should consumer spending stall out, then we might be seeing a near-term top in this index, and we could see an equal percentage gain loss or worse ( the head and shoulders target would be 51, and that would give you a 51-65.1301/65.1301 or a 21.7% loss) . So mixed is the picture in 2013, anything could happen. If we do not take out 68.60, the bearish pattern scenarios would be in play quite seriously, so that level needs to be watched carefully. What I think you should take away from this analysis is that the QQQ probably has one year at most left before there is some kind of significant correction coming. The insane valuations of the past are not achievable until earnings and inflation match the pricing structure. When companies values are based on sales (as they were in the late ’90s), it will take a very very long time before that index high will be topped (and I doubt it will be in my lifetime).
$INDU: I quite frankly do not care about the Dow Jones Industrial Index because it is simply a collection of 30 stocks that are oft manipulated to suit the times. I am going to stop with the top two indices at the moment and move on to other topics.
I do think that 2013 could signal a near term market top. I was going to make a much broader explanation of why that is, until I saw another good piece by John Mauldin, who of late has compiled a string of good ones. Though he is a seller of money management services, he has in the past done a good job of summarizing a lot of the things I used to avoid the crashes of 2000 and 2008-2009, taking a longer historical context of the dilemma we face as investors. This article basically summarizes what my post is about (which saves me a ton of time to discuss). You have read many of my post on John Easterling’s works, so I will not go back to that. The important point of this article is that the inflation adjusted PE for the large cap $SPX is still (depending upon how you calculate it) somewhere between 20 and 22. This is typically a maximum valuation that would appear before a severe bout of deflation or inflation hits the markets.
In either scenario, that means that price earnings ratios will soon get compressed when either of the two factors take hold. That means stock prices will fall until there is adequate valuation discounted to outweigh the returns of rising nominal interest rates. Because our economy is being de-levered from the idiocy of the “everyone must own a home” mantra of our re-election obsessed political class that caused the frenzy of banking and mortgage misdeeds, we will likely continue to see weak asset pricing until growth comes back into the economy. Historically, the United States (from founding to 2008, had an average GDP growth of about 3.0% per annum. We are at somewhere between 50 and 75% of that currently. Should the U.S. return to average or above average GDP growth, all of this quantitative easing that sits on the Federal Reserves balance sheet will indeed come to roost, which could create another equity collapse not unlike what happened in the mid-1970s (when I began watching markets). That will be a very difficult task I would imagine, but it will eventually end up causing inflation at some point. In the end, stocks do well in inflationary environments, but not before some clarity can be provided between real risk free rates and the value of equity cash flows in terms of net earnings and dividends to shareholders.
What am I doing about it?
I just told you for the first time in about 4 decades that I am out of everything, bonds and stocks. I am NOT giving up though.
Because I am in a position to wait for values to come to me, and because I am, after all, 57 years old, and not wanting to do riverboat gambling with my assets, I will:
1) Look for cheap stocks with regard to discounted cash flow and dividends. I want to increase my total return so I can ride out what could be another halving of asset prices before this secular bear market ends. What that means is I will look for significant pullbacks to occur to buy assets that have solid and growing cash flow and earnings and have a history of stable or growing dividend payouts that are not at the extremes of the dividend payout ratio. I want to find stocks that could give me a significant capital gain over time while paying me a return as well. Those stocks are kind of rare, but if you wait for weakness and do your risk management procedures to mitigate against loss, you can do better than market averages over time.
2) I will in the near term also buy protection for those assets I buy (that is, I will use some kind of spread or covered call strategy) to protect against the downside that may (and likely will) occur during that time. If it means I have to use L.E.A.P.S. to do that, I will. I could also structure options collars to allow some room to move as well.
3) I am still trading liquid vehicles, but this time I will defer swing trading stocks for shorter term trading in foreign currency pairs. The idea here is to use the leverage and money management to slowly build up cash that I can place in other asset classes as I make money. This is NOT a strategy for everyone, but it is something that I can manage without sitting in front of a screen every minute. I am devising models that look for breakouts above price structure and pivots and allowing the model to move stops as profit targets are hit. Risk will be managed not only by position size but also by the developed equity curve itself for a single unit. As that equity curve declines, I will stop trading until that trend reverses, and manage position size up and down depending upon the level of profits obtained.
4) Because I can, I manage other income producing investments like real estate. Not everyone can do that, but even if it means you have to start a second job or start your own business, you will have to find a way to earn more money to save for your retirement. The statist elites of both major political parties have just recently made it more difficult for you to do that (particularly if you are an independent contractor or self-employed person), but you have to do what you have to do to fight against the tide of ignorance that put this current bunch in power in the U.S.A. One of your new businesses (which would be unpaid of course) is to educate your children to understand what liberty and economic freedom is and to teach them to uphold it. That is one job that should take top priority.
5) As we always seem to do, at some point, whether it be 1 year more or 12 years more (which would equal the longest bear market in American History), we will come up on the good side of this asset cycle and the buy-and-hold-ers can be free to invest with a decent chance to obtain a consistent annual return. We are NOT there yet, however. One has to study fundamental value, market trend, and sector strength to really have a shot and beating market averages over time. But if we once again see single digit inflation adjusted price/earnings ratios, that job will suddenly become a lot easier. Until then, you will just have to keep your eyes open!
Thank you once again for supporting my blog!