Stocks are up. Great! What’s next?

Founder and Publisher of the Switzer Report
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There’s no more appropriate time for a market review and outlook statement for the month ahead. The famous January Effect has worked out off the back of a fiscal cliff affected Santa Claus rally and so subscribers and my financial planning clients are asking: “Can this rally last?”

I have two answers. First, for the year and probably 2014 — it sure can! Second, for the month ahead and into the mid-year — I don’t know.

I’m not a trader but if I was I’d be selling and taking profit because since mid-2012 we have done unbelievably well. It has been huge!

Since June last year, we’re up around 23% on the S&P/ASX 200 and 12.9% since November!

As I said — it has been huge.

Lance Lai from Accountancy Invest, and someone who has been on the money for some time now, agrees with my 2013 view — stocks look the way to go. However, like me, he thinks the big run up since November is screaming out that a pullback must be on the cards.

Bad news to derail the rally?

So, what could be the trigger?

The Yanks got a bad GDP number overnight — negative 0.1% for the annualized reading for the December quarter, after a 3.1% reading in September. However, it was linked to a cut in defence spending, the US election, super storm Sandy and a fall in inventories, which is a good sign that sales are happening and re-stocking will push up GDP in the March quarter.

A bad jobs figure on Friday, which no one expects, could worry the market, but I’m ruling this out.

No, I reckon February could see stocks become volatile — more up and down — because on March 1 automatic across-the-board spending cuts are set to kick in, unless Congress can come with an alternative. Happily, both sides don’t like the scheduled cuts but still agreement does not come easy in Washington. They make our mob in Canberra look half-responsible!

The expected argy bargy could unnerve the market, as spending cuts will hurt GDP growth — like they did with the December quarter figures — and then company earnings will be negatively affected, so this could make February a challenge for stocks.

Add this to the fact that stocks have really rocketed and then there will be those who will be anticipating that market maxim — “sell in May and go away” and we have some forces that could put a lid on stock price growth in the short-term.

Also in May, the US Congress has to revisit the debt-ceiling can, which they kicked down the road a few weeks back.

In addition, locally, we have reporting season and, as the economy has slowed and the dollar remains high, I’m not expecting fantastic news there.

Buy during dips

But don’t worry too much, as I’ve been using the strategy to buy stocks on dips — so I have liked dips — and this has worked out nicely for the past three years, and I’m sticking to this for 2013.

One thing I should add. There is a rotation out of term deposits and bonds back into stocks and this could offset fears about the US Congress and debt, which means the dips could be shallow and, possibly, non-existent if everyone believes that Congress has to find a solution.

We’re in historically unusual times and that’s where maxims such as “sell in May and go away” can be turned on their head.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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