Stocks moved up dramatically in January as near record fund inflows came into the equity markets. Investors on the sidelines seemed to have all gravitated at the same time into the equity markets driving markets into overbought territory by mid-month. However, this is a seasonally strong time of the year for equities and stock markets have a tendency to ignore traditional measures of market breath and excess enthusiasm during such period.
If you recall this same thing happened last year. It began in Mid-December and despite my feelings that markets were too rich in January, the rally lasted all the way to the end of April. Quite frankly, as I learned last year, if you are sitting on the sidelines waiting for the right time to get in, you may never get it! It is also important to ride the trend to the end and not try to pick the top.
As I reviewed this current period in comparison to that period, I couldn’t help but notice the similarities between the periods.
This current rally began earlier than last year’s by about 1 month (mid-November 2012). Last year’s rally lasted four full months. Assuming history repeats, that would give this one the possibility of lasting through February and into mid to late March. Of course, history does not always repeat.
For the month, the S&P 500 finished up 5.04%. Not a bad way to start the new year.
The Nasdaq index finished up 4.06%, while the EAFE index finished up 3.73%.
Our investment strategies did well during the month averaging 1.98% to 3.45% for the period. We must admit, we viewed this rally with a bit of skepticism and we were not as fully invested as we should have been during the entire period.
As in past periods where we missed the mark, we immediately looked for an indicator, signal or model we could leverage to get more out of future melt up periods. I won’t bore you with the results, but we found one.
We also developed a new model to help us refine when to add some leverage and when to remove the leverage (only related to some strategies). Again, the longer you do this, the more proficient you get at handling those markets where history seems to repeat. Unfortunately, not every market is a repeat!
All I can say about this year is that we are in much better shape than last when we doubted our signals and missed a good portion of the ensuing rally.
Market Forecast – February/March
I think I already hinted at what I expect in February and March above. As much as it pains me to admit, we could well see a continued melt up over in February and March. Why pain? It just means that traditional indicators (other than price) become less dependable.
Now having delivered the possible good news, I do envision much greater volatility of returns during this period. In fact, I would not be surprised to see the market string together periods of decline only to miraculously recover to even higher highs.
This possible scenarios also lines up with the likely period in early April where Congress has to again take up austerity, budgets and the debt ceiling. This now annual right of passage for Washington is traditionally a drag on the markets. If you factor in strong seasonality that traditionally ends in April, you have the makings for a rally continuation (like last year).
The Stock Trader’s Almanac tends to back up this possible bullishness with its statistical case for a strong 2013 based on a strong January, three consecutive January gains and the fact the market returned north of 5% for the month. You can read their analysis called the Curse of Round Numbers if you want more information.
I still believe we could see a top for the market in late April or May and as I said in an earlier video forecast. The easy money has been made in the short-term, any additional returns from here will likely carry a few more sleepless nights and a more volatile trend.