I'm not so sure what's in store for the market in 2014. I'm thinking we could see a flat year with a major scare sometime mid year but I don't say this with any great conviction and I'll be quick to change my mind if evidence suggests so because I'm still LT bullish. Last year I was expecting the good times to continue in 2013 and we certainly saw that, but now that we've had a hell of a run these past 2 years, it sure seems like the market is due for some sort of consolidation especially given some serious warning signs flashing out there. I'm not alone is such a view and so if the market is due for at least a major shake out it's quite likely going to be elusive and frustrating for anyone trying to time it. Many people I'm sure have been laid to waste in recent years betting on corrections.
The thing that concerns me in the medium term is that I get the distinct feeling that there's a lot of weak longs in the market, i.e. those who are long stocks simply due to momentum and so it follows that they will exit en masse once the momentum is gone and violations of trend lines, moving averages and other useless t/a garbage triggers stops. In 2013 margin debt rose substantially and we've seen retail come back in a big way. None of this is as dire for the market long term as the bears are suggesting (and man were they premature with such worries in 2013) but it does suggest that the market is frothy/vulnerable in the medium term similar to how it was in the first half of 2011 after 2 strong years which saw margin debt spike as well. Another thing that suggests the market is ahead of itself is how some really sharp value managers with great track records are having a hard time finding any bargains and so they are sitting on a large cash position. Value line appreciation potential index is at a multi-decade low which is bearish too. Finally there's sentiment as per newsletter writers, NAAIM and AAII which also indicate too much enthusiasm for equities in the short to medium term.
Having said this though, the conditions for a bull market peak are not present, namely, monetary conditions are still ultra loose even with tapering on the horizon, inflation is not a threat and public greed/complacency is absent. How do you test this notion? Ask your neighbors what they feel about the economy and the stock market. How does the media perceive the strength of the economy? I doubt very much you can make the case that the public is optimistic yet alone complacent. An objective measure of such is consumer confidence. It's currently at 83. Bull market peaks have been made when confidence hits 100+ for at least a few months. I posted the investor "risk appetite" chart not too long ago which showed investors are not yet at the "risk loving" stage which again indicates an absence of the type of greed you see at bull market peaks.
So, the bottom line here is be cautious for the medium term but still optimistic long term. If you see a great individual stock opportunity by all means go for it, especially if it tends to not trade in tandem with the general market, but keep healthy cash reserve until we see the "medium term froth" get washed out. I suspect if we are going to get a nasty correction it won't happen until sometime closer to mid year with many little dips and headfakes along the way and so it's quite possible, like in the first half of 2011, that the market goes higher first before going lower in a big way but this is more of a guess than anything. Don't get too cute. Be disciplined.
I'm currently holding 60% cash with the majority of my equity exposure in Greenstar. I'll talk about GRE next post.
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