2013 and beyond

It's been almost 4 years since the bull market began. I heard more than a few times people refer to the bull market as "aging" or "long in the tooth". Well, it's true. Historically speaking, cyclical bull markets last about 4-5 years, but bull markets don't end just because a certain number of years have elapsed. Take a look at the runs the market had in the 1980's and 1990's to see examples.

You can find literally hundreds of detailed, well researched reports and opinions about where the market is headed, many of which are in complete disagreement yet equally convincing.  Institutions pays thousands of dollars for such reports. But here's something I've learned which is so simple, yet so critical and it's something I've been preaching here for years now....History shows that bull markets don't end until there is a general sense of optimism about the economy from the public and the fed is tightening rates to the point where monetary conditions are restrictive (which will be apparent via an inverted yield curve). High optimism and tight money - that's it! That's the recipe for a bull market peak! It's so simple! So, given what I just said, are we at a point where there is high optimism and tight money? Not even close! It's the opposite! Despite all the buzz about there being a very large equity fund flow last week, there's still a long way to before we even reverse all the outflows from the past few years yet alone show net positive inflows. Ask your neighbors what they think about the economy and you tell me if there's any optimism out there, yet alone high optimism. Meanwhile, all the major central banks around the world either have accommodative or extremely accommodative  monetary policies with Japan recently joining the latter. Monetary policy is important. In 2011 central banks in emerging market countries were tightening and it resulted in negative returns for those markets that year....not a bear market per se, but a dawn out,  multi-month correction.

We know from history and based upon how Bernanke thinks, the fed isn't going to take away the punch bowl until there is undeniable evidence that the US has recovered from the financial collapse of 2008. That evidence will be in the form of strong job growth numbers - I'm talking about 200K+ jobs per month on average for about a year and so on that note, I don't think we need to worry about the threat of the fed tightening this year.

So, to me it looks as if 2013 will be yet another bull market year and there's no big bad bear lurking around the corner. Having said that though, we need to keep our guard up for intermediate term corrections and admittedly, since this bull run began,  IT peaks were not too far off anytime we have seen a spike in inflows like we have been seeing lately. So, at this point, stay selective and hedge if you know you can't handle a 5%+ correction. However, if you look at history there will come a point during a bull market advance where inflows are well tolerated and are not a contrary indicator until they reach a LT extreme. I don't know if that's going to be case at this point, I'm just saying that this spike in inflows is not the death knell of the bull market since from a LT perspective we've got a ways to go before "everyone is in the pool".

The bottom line is that until we actually see a lot more people embrace the stock market while at the same time the fed is taking away the punch bowl, the correct posture is to be a LT optimist looking for LT opportunities on the long side. When you have IT concerns, go ahead and hedge or raise cash but don't overdo it. And no matter how scary things get - and I'll be the first to admit I've been scared at times despite being a LT bull - always keep in mind that we have not seen the classic conditions that marked the end of a bull market (not even close) and so keep a cool head with the expectation that any downside will likely only end up being a correction and not the start of of a new big bad bear market.