The trend is our friend

Founder and Publisher of the Switzer Super Report
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These are tough times for active traders as they agonise over whether the market will keep rising or sell-off.

By the weekend, the Dow was up 5.99% for the year, the S&P 500 was up 8.24% and the Nasdaq was up a whopping 13.31%! Meanwhile, our local S&P/ASX200 is up only 3.4%!

So any retracement period could easily wipe out our gains, which have been beaten-up by our relatively high interest rates and the fact that this has helped our Aussie dollar jump from parity to 107 US cents.

A rate cut last week and a commitment to further cuts could have been a nice fillip for our stock prices, but unfortunately, the Reserve Bank of Australia (RBA) is worried about that pipeline of business investment linked to the mining boom.

The RBA seems unruffled by headlines of job losses and the 46,000 or so jobs created in January didn’t help the cause of those hoping for some rate cuts.

By the way, we lost 43,000 jobs over November and December and so the net gain in employment was only around 3,000. So is a pullback likely?

Profit taking

Lance Lai, the director of Accountancy Invest, says the ‘hangman’ formation on the stock charts has re-emerged and while the last two have been taken out by good news, he says the market is vulnerable to a sell-off, which the ‘hangman’ predicts.

And looking at the gains for the S&P 500 and the Nasdaq, a sell-off is certainly on the cards. Having said that, tonight we should get good news out of Greece, which could easily send European stocks higher. In turn, this would help our stock market track higher as well.

Sam Stovall, chief equity strategist at S&P Capital IQ, told CNBC that after a bear correction, such as the one we saw in August and September, he sees a rebound of 23% on average. I made this point to readers late last year, but Stovall now expects a sell-off – but it doesn’t have to be drastic.

Stovall thinks the S&P 500 could go down to 1,300 from its current 1,361 level – a loss sell-off of 61 points – and then head up to 1,400. But he says the volatility continues with a steeper dive in the second or third quarter of this year.

Recall the old US market observation that I mention often: “Sell in May and go away!” This often works and given the massive market run-up, you would have to expect that short-sellers and hedge funds will bet against the market going up all year.

Long-term growth

A plus ahead for the market could be the European Central Bank’s plan to swap its old Greek bonds for new ones, which will help Greece and mean the central bank avoids taking a haircut like the private creditors.

Citigroup’s chief US equities strategist, Tobias Levkovich, in a note Friday points out that the market appears to be at a near-term top.

Looking at the year ahead, I believe we will see a lot of volatility but the overall trend should be up. There are many respected analysts who have put the S&P 500 up over 1,400 for the year, but I think they are being very conservative. Sure, an 8% gain in less than two months is big, but there will be retracements; history says an election year is good for stocks and this will be supported by a US economy which is powering along on the back of easy monetary policy.

I think 2013 will be another good year for stocks, but 2014 – when interest rates start rising in the US – could pose a few challenges. Even so, higher rates in the US will help us because our dollar will fall.

For the moment, the trend is our friend and is until it bends.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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