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The fiscal cliff, tax increases, the debt ceiling, missed earnings
investors certainly have had much to worry about lately. So why in spite of these fears has
the market continued to rally?
There's a Wall Street bromide that succinctly answers this question: Bull
markets climb a wall of worry. Fear
tends to fuel higher prices when internal momentum is rising due to short
covering and other technical factors. Its normally not
until everyone has entered the market that the market finally tops out.
Many are wondering why the market has been so strong in the face of
all these potential pitfalls. The best answer Ive heard for this question to date
is that the U.S. stock market is the "best horse at the glue
factory" so to speak.
As one newsletter writer pointed out, Pension plans get contributions
every month and have to invest them. Individuals are saving money and they have to invest
it. And high yielding bonds and CDs from yesteryear are maturing. What are your investment options? Certainly
not low-yielding CD's and Treasuries. Moreover, the dividend yield on the Dow was recently
as high as 2.6%, well about the yield on a 10-year T-Bill. In other words,
the U.S. stock market is winning the race for investors
dollars by default.
On the investor psychology front, the latest AAII investor sentiment
readings have been at their most enthusiastic in several
months. The percentage of bullish investors recently
hit 52%, the highest bullish reading since last February
8. Bullish readings above 50% often signal market tops, or at
least serve as preliminary warnings that a top is ahead. I would
point out, though, that last years (Feb. 8) 52% bullish reading in
the AAII poll was followed by nearly two more months of higher prices in the
S&P before a sizable correction occurred.
Along with increasing investor enthusiasm has come
an increase in equity market inflows. CNNMoney
pointed out recently that investors poured a record $8 billion into U.S.
stocks at the start of 2013 after removing more than $150 billion from U.S.
stock mutual funds last year. According to the Investment Company
Institute, the $8 billion investors put back into stocks as of January 9 was
the highest amount within a short space since ICI first began keeping records
in 2007.
As Hibah Yousuf of
CNNMoney wrote, The massive
inflow represents a significant departure from the recent trend of investors
fleeing the stock market. Along
these lines, Art Huprich, chief technical analyst
at Raymond James asks, Is there a slow yet marginal shift
out of fixed income and into equities taking place? Its
still early, but its beginning to look that way. Assuming this
trend continues it would certainly jibe with our Kress cycle echo
forecast for 2013, which concluded that this year would likely resemble 2007
in many ways. In other words, 2013 could prove to be a major
topside transition year with some major ups and downs along the way as
investor bullish sentiment reaches a crescendo.
In the meantime, it will do well to keep in mind the famous saying of
the venerable Charles Dow: Neither the
length nor the duration of a trend can be forecast. The best we can do is identify trend changes and act
accordingly.
U.S. Economy
The Bureau of Economic Analysis said fourth quarter GDP contracted by
0.1%, which represents the first such contraction in over three
years. Most of that contraction was due to a 22% decline in
government defense spending, however. Personal consumption
expenditures, accounting for 70% of GDP, rose 2.2%. This is more
in line with the New Economy Index (NEI) which rose to a new high last
week. According to Briefing.com, this was also the largest
quarterly uptick since a 2.4% increase in consumption was reported during the
first quarter of 2012.
The NEI chart shown above is the true reflection of the U.S. retail
economy. Its telling us that
consumers are still spending and show no signs as yet of letting up. We havent
seen an economic sell signal in this
indicator since the early part of 2010. Its
possible, however, we could see one at some point later this year as the
economic headwinds begin to increase.
Gold
Speaking of economic headwinds, these include the Congressional battle
over the U.S. debt ceiling, a potential downgrade of the U.S. credit rating
by Moodys, the continued weak labor market in the U.S.,
trouble in the Middle East and North Africa, and the coming implementation of
Obamacare. Each
of these factors, if not offset by an equally positive event, could prove
sufficient to galvanize a gold rally at some point.
On the subject of the U.S. credit rating, the editors of The
Kiplinger Letter concluded that if Moodys or
Fitch Ratings were to downgrade the countrys debt, banks,
insurers and others may need to shuffle some assets
around. If Treasury holdings no longer qualify as ultra-safe,
other, high-risk investments may need upgrading to toe the line on statutory
capital standard requirements. Kiplinger also
suggested that this could cause some erosion of the dollars
status as a reserve currency. Such a development would likely
prove favorable to gold.
One person who believes gold will have a good year in spite of the
negative investor sentiment is Rob McEwen, chairman and CEO of McEwen Mining
(MUX). According to McEwen, gold tends to have a positive
performance in the year following a U.S. presidential election. He
points out that in the seven electoral contents from 1984 to 2008, gold
climbed by as much as 85% in the year after the election. The
yellow metal suffered only one decline in that span, a 36% drop in 1997, the year following Bill Clintons
second election victory.
McEwen also noted that gold stock prices as measured by the Gold
Silver Index (XAU) fell in all presidential election years dating back to
1984, including last year, when the index declined 8.3%.
Were currently in a cash position as we await the next
confirmed buy signal from our indicators for gold.
Clif Droke
2014:Americas Date With Destiny
Take a journey into the future
with me as we discover what the future may unfold in the fateful period
leading up to and following the 120-year cycle bottom in late 2014.
Picking up where I left off in my
previous work,The
Stock Market Cycles, I expand on the Kress cycle narrative and explain
how the 120-year Mega cycle influences the market, the economy and other
aspects of American life and culture. My latest book,2014:Americas Date With Destiny, examines the
most vital issues facingAmericaand the global
economy in the 2-3 years ahead.
The new book explains that the
credit crisis of 2008 was merely the prelude in an intensifying global credit
storm. If the basis for my prediction continue true to form
namely the long-term Kress cycles the
worst part of the crisis lies ahead in the years 2013-2014. The book is now available for sale at:
http://www.clifdroke.com/books/destiny.html
Order today to receive your
autographed copy and a FREE 1-month trial subscription to the Gold &
Silver Stock Report newsletter.
Clif Droke is the editor of
Gold & Silver Stock Report, published each Tuesday and Thursday. He
is also the author of numerous books, including most recently, 2014:Americas
Date With Destiny. For more information visitwww.clifdroke.com
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