At over 4-1/2 years old, the current bull market is already one of the longest since the Great Depression, and MoneyShow's Tom Aspray examines the technical evidence for signs of how much higher it can go before the end of the year.
Many who are not invested in stocks have been fighting the urge to buy stocks as the market moves higher and higher. The evidence continues to suggest that the public is still not very invested in the stock market. As rates continue to edge higher, many are now also facing losses in their bond portfolios and their year-end statements may provide a shock.
All of the major averages, except the Nasdaq 100, made their highs at the end of November before correcting last week. This was consistent with the deterioration in the technical studies that was especially evident after last Monday's close. It will take more than Friday's sharp rally on the jobs report to reverse the signs of deterioration.
Things are much different than a year ago, as in December of 2012, the NYSE Advance/Decline line was leading prices higher, so I felt fairly confident just before Christmas that 2013 would Be Another Double-Digit Year. With the Spyder Trust (SPY) currently up 27.50%, the question now becomes will stocks hold these gains until the end of the year or will they close even higher?
Let's look at the evidence. First of all, December is a good month for stocks with an average return since 1950 of 1.6%. This would give an end-of-the-year target of $183.89 (see chart) for the SPY.
One can get an even more bullish forecast by just looking at those years since 1990 when the S&P 500 was already up over 20% or more at the end of November. This has only occurred seven times in the past 22 years and the average December gain was 3.5%. This would give a year-end target for the SPY of $187.33. The best year was 1991 when the S&P was up 11.1%.
Unlike last December, the key technical studies are now acting weaker, not stronger, than prices so I cannot be nearly that bullish going into the end of the year. If you look at the years since 1950 when the S&P 500 did close lower in December, the average decline was just over 2%. If the SPY were to close 2% lower this month, then the SPY should settle 2013 at around $177.38.
From the current technical readings, as well as the pivot point and Fibonacci analysis, it is possible that the SPY could decline 3.5% in December, which would give a target for the SPY at $174.70. On the chart, I have drawn a year-end target zone that ranges from $173-$176 (box on chart) with a mid-point of 3.5% or 4174.68.
A correction should give those not in the market an opportunity to buy. Hopefully many of you started a dollar cost averaging program as suggested in August and have been participating in the market's gains.
I see no signs of a major top for the stock market, though it is not clear yet whether we will see a brief setback or a more extended correction. After a correction, the sentiment for stocks should be much less bullish, which will create an environment that will allow the market to move even higher. This week's action should give us additional clues as to what type of correction is the most likely.
If you are fully invested, raising some cash would be a good idea, and you should also sell or reduce the position in those stocks that are not performing. This is the strategy that I suggested last week in the review of the Charts in Play portfolio. There are always exceptions but those stocks that have not rallied with the market since October are likely to be the most vulnerable when the market corrects.
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