Seeking Alpha
Long/short equity, registered investment advisor, portfolio strategy
Profile| Send Message| ()  

This is the time of year when investors tend to take stock of their efforts over the past twelve months. Investors big and small look back on the year that was and try to determine what went right, what went wrong, and if any changes need to be made going forward. In other words, this is the time to assess how your approach to the markets fared in 2013 and what your strategy is going to be for the coming year.

While this may be restating the obvious, one of the biggest mistakes many individual and professional investors alike made in 2013 was to miss out on the stellar gains that were available in the U.S. stock market. To be sure, it is a rare year when the U.S. market is THE place to be. It is rare when diversification is a dirty word and exposure to bonds, gold, emerging markets and commodities cost your portfolio a pretty penny.

The Key to 2013 Was ...

But that's exactly what happened in the past year. If you focused on the U.S. and you had a strategy to get in and ride the bull trend, you had a good year. If not, well ...

If you didn't manage to capture a healthy chunk of the 25+ percent gain from the S&P 500, don't feel bad because an awful lot of investors didn't. And we're not just talking about Mom and Pop here either. Nope, after a disappointing year, a great many pros will be happy to hit the performance reset button on January 1, 2014.

For example, Hedge Fund Research's Composite Index sports a gain of just 8.28 percent for 2012 through the end of December. Granted the two-and-twenty crowd doesn't target the stock market exclusively. However, the disparity between hedge fund returns and the S&P has rarely been so large. The point is that if the brightest minds on Wall Street underperformed the stock market in 2013, don't beat yourself up too badly if you did too.

The problem: Too Much Macro

After the credit crisis and the seemingly never ending European debt crisis, too many investors fell in love with the "macro" approach to investing. With correlations among asset classes having been stuck on "1" every time a crisis reared its ugly head, investors decided the best thing to do was to play the "risk on, risk off" game.

The only problem here is, unless you are a skilled, experienced macro player, basing your investment strategy on your macro view of the world can be a mine field. Unless you understand that economics don't always drive the market, basing your exposure on expectations for employment, inflation, or GDP can be a real problem. And unless you have a solid understanding of "cause and effect" in this business, focusing on "macro" can easily lead you astray.

Think back to the beginning of the year. Europe was in recession, China's growth was slowing, Unemployment in the United States was stubbornly high, and GDP growth expectations weren't exactly strong. So, why on earth then did the U.S. stock market surge 25 percent?

It's All About The Future

This is where the cliché, "something everyone knows isn't worth knowing" comes in. U.S. stocks moved higher in 2013 because the outlook for the future was improving. Corporate profits were set to hit an all-time high. Inflation was low. Interest rates were extremely low. And unless a new crisis suddenly appeared, the future looked brighter. So, that negative macro view was rear-view mirror thinking.

Remember, the view that the sky was going to fall in 2013 that so many investors held dear at the beginning of the year was essentially "old news." The markets had been dealing with Europe for three years already. The unemployment in the U.S. was indeed high, but it was also improving. And since the U.S. economy hadn't double-dipped in the face of Europe and the idiocy in D.C., well, it probably wasn't going to slip back into recession on its own.

The Solution Is ...

So, when looking ahead to 2014 there a couple things to consider. First, what occurred in 2013 isn't likely repeat in 2014 - so do yourself a favor and don't expect it to. Sure, history may rhyme on occasion, but it's probably not a great idea to go into the New Year expecting another 25 percent gain. Okay, it could happen. But betting on it probably won't be the best plan of attack.

No, the better way to play is to understand that if you want to capture the types of gains that were available in 2013, you've got to have a plan to do so. Remember, no one rings a bell when it's time to get in or out of the stock market. As such, you've got to have a strategy to lean on.

What's Your Plan Going To Be?

So, as you review what went right and what went wrong in your portfolio in 2013, ask yourself; what is your plan going to be next year? Do you have a system, a strategy, or even a signal or two that will alert you when the environment is changing? If not, doesn't having one sound like a good idea?

Since everyone will still be waiting on the Fed to make their decision on the taper, tomorrow morning we'll try to be of service in this regard. On Wednesday, we'll take a look at one buy signal and the one sell signal you could take with you to a deserted island and still stay on the right side of the market's big moves. Oh, and the buy signal being discussed would have gotten you invested in U.S. stocks on January 4, 2013.

Turning to This Morning ...

Despite economic sentiment data coming in above expectations in Germany and the Eurozone, European bourses are sagging this morning. Stock market indices were mixed in Asia with Japan higher and China lower. Here at home, U.S. futures are slightly ahead of fair value in the early going as traders appear to be on hold until the FOMC announcement tomorrow.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell ...

Major Foreign Markets:

- Japan: +0.83%

- Hong Kong: -0.20%

- Shanghai: -0.46%

- London: -0.22%

- Germany: -0.14%

- France: -0.68%

- Italy: -0.23%

- Spain: -0.15%

Crude Oil Futures: -$0.27 to $97.19

Gold: -$6.70 to $1237.70

Dollar: higher against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.866%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: +1.51

- Dow Jones Industrial Average: +23

- NASDAQ Composite: +2.21

Thought For The Day ... "People of accomplishment rarely sat back & let things happen to them. They went out & happened to things" -Leonardo Da Vinci

Positions in stocks mentioned: none

Source: Daily State Of The Markets: 2014 - What's The Plan, Stan?