The stock market levitation continued throughout the entirety of 2013, despite the many instances where analysts were calling for a “much needed correction”. As a result of nary a correction lasting for a few days or a radar blip of a few percentages points at most, many investors sat on the sidelines reading the repetition of headlines that major stock benchmarks have made new all-time highs. It is our belief the panic to get invested has yet to come, which could create an avalanche of buyers recklessly biding up equities as they storm the gates of the electronic bourses like marauding armies lusting for the better life that lives behind the castle’s walls. Of course what lies behind the walls may not be eternal bliss or even greener fields and many storm troopers may get buried in their attempt to escape back home.
When might this ingress of purchasers occur and how will it look? Sooner than you think and perhaps even more parabolic than what one might believe. On back to back dates toward the end of this month of January (to be exact, January 28th and 29th), Obama’s State of the Union speech is followed by the new Janet Yellen led FOMC meeting. If Obama doesn’t widen the ideological abyss that exists in the halls of Congress with evermore wealth distribution tactics or seeking to bridge the economic distortion of incomes and lifestyles caused by QE, the markets may appear comatose; tranquility before the rage. The rage of course coming the next day when the markets learn that a Yellen Fed will keep the risk trade pegged for long distances into the future. Yellen is a believer that even more stimulus is required and her version of “transparency” is the enlightenment that fed funds rates will remain Zirp bound until at least the end of 2015. More so, any thoughts that tapering will be anything but penny pinching cut backs will be definitively allayed much to the vexation of Board Governors Plosser and Fisher with Lacker sitting on the QE fence.
What about the early January selling that occurred this month and how might this effect the markets trajectories in the near term? We believe that a lot of the selling that occurred earlier in the month was capital gains related selling out at market highs and rolling forward taxable gains into the next tax year. This may prove to be very smart and mostly prudent, unless of course the island landing turns out to be a refueling stop only. If the plane starts taxiing down the runway while the fat cats relaxing poolside with their piña coladas relishing their impeccable market timing and cleaver whit versus the taxman, their frappėed coconut concoction may quickly turn sour thinking they will be left behind on an island of fools. Making a long(er) story short, the 30 day wash sales rule could thrust the markets even further forward with gap up openings in the early part of February. Then along comes the Ides of March; the sobering thoughts of reality against a backdrop of stalled earnings, margin compression, the heavy hands of government regulation with the likes of Obamacare, the Volker rule, more Dodd-Frank and a media circus surrounding the pathology of Obama’s foreign and domestic failures.
By the end of the summer, a word that has been effectively removed from the annals of market behavior will likely reappear on the lips of many cardiogenic shocked observers … volatility!
Be nimble, be quick and don’t get caught in a bearish engulfing candlestick!
Ron George & Bill Taylor