Have you ever watched an old grandfather clock with a pendulum swinging from one side to the other and become somewhat hypnotized with its movements? Think of the market like that clock. The left side as we face the clock is oversold and the right is overbought then understanding market movements start to make sense. As the pendulum reaches the peak of its movement on the left side as it was in early 2009 and now it may be reaching its peak in 2014. What we can learn from this is that markets will always travel from oversold to overbought, however to profit you must have a strategy that compensates for these movements.
The bull market run continues with all major indexes hitting all time highs except for the NASDAQ which is reaching a 13 year high. Next week is a very important week in the context of data and a policy statement from the Fed which could set the tone for 2014. Unless the data is much stronger than it has been, tapering will not commence until early spring 2014. As long as any action from the Fed does not drive up the 10 year above 3.00% then the bull market should remain intact. I still feel that the fair market value of stocks is still 10% to 15% higher, although markets rarely reach their fair value in a straight line.
Over the holiday I dug out of my library an old book on trend following. It is always enlightening how basic market principles never change even with all the new technology and evolution of various trading concepts. Right now the market is in a strong uptrend and these types of trends are not easily broken. Observing our three elements of market health (investor psychology, monetary conditions, and market valuations) we find an overall bullish condition.
The problem is that most market watchers especially public investors and most professionals pay so much attention to the short term view. Short term views are the most unpredictable and are the one that keeps the public investor on the sidelines until the news turns out very good. This results in buying high and selling low. Consumer sentiment is right at the lows of the last few years and this intense pessimism has occurred throughout this rally-the S&P has moved from its low of March 9th,2009, to Fridays close of 1806, almost tripling from that low point in 2009. During this period everyone I talked to never really felt good about the U.S. and world economy, or the low risk of the market and this feeling is still prominent today.
If our observations are correct then the S&P could reach 2014 in 2014, however it will not be a straight line and possibility of a correction is in the cards but will help accelerate this 2014 in 2014 due to so much cash on the sidelines will provide much need demand for equities.