All good things must come to an end and thus so will the rally that has taken the S&P up over 20% since the end of August. While I am not calling for a new bear market or a revisit of the lows of 2010, I am calling for a pullback to occur in the early part of the month of January. Here’s why: There is a cloud of shit on the horizon.
What do I mean by the cloud of shit. The cloud of shit is simply uncertainty created by numerous future events, either planned or unplanned. The market doesn’t like uncertainty in any form but especially when it comes in the form of a cloud of numerous sometimes related and sometimes unrelated events. The following is the cloud of shit that I see forming:
1) Important economic data is coming out next week. This data is expected to come in positively so this could keep the market up, especially the ISM which I believe comes out on Monday 1/4 and Wed 1/6 (for the services sector) and the Non-Farm Payrolls which comes out on Friday 1/8. I think that the Manufacturing ISM number should be fairly strong as both Philly Fed and Empire Manufacturing both came out strong. As such, the market could rally from Monday to Wednesday. Then I think that we drift or even start to trade down into Friday’s Payrolls number which is also expected to be good, at least the revision for November, but after that, all bets are off. On additional point to consider on the economic data is that everyone is expecting good numbers so if they come in light look out.
2) Earnings season starts on Jan 10. While earnings for Q4 2010 are expected to be good, there is some question about 2011 outlooks. This is uncertainty that the market will not like.
3) Congress comes back into session. This creates political uncertainty and, as well all know from the events of 2010, the market hates political uncertainty.
4) Related to the above point, Ron Paul is taking over the Chair of the Domestic Monetary Policy House Subcommittee in January. This committee overseas the Fed. Given that Ron Paul wrote a book entitled “End the Fed”, his very appointment could create uncertainty over not only the long term future of the Fed but the greater influence of Congress over the Central Bank in its near-term activities like QE2 and it current loose monetary stance. The market has forgotten this but they will be reminded as his appointment nears.
5) European bond auctions will resume in January with Spain and the other periphery countries looking to raise as much as 80 billion Euros of new paper in January alone. Europe will continue to be a concern for the market, especially as we move into the new year.
6) Tax gain selling usually happens in January as investors sell winners from the prior year to defer taxable gains into the following year.
7) Sentiment is very bullish and investor may try to take advantage of the bullish sentiment by taking a contrarian view.
There are other items but isn’t that enough. A little over a month ago, in my “How About a Guinness with your Dim Sum” blog I called for a rally into year end and I listed the reasons. Since that blog, the S&P500 has rallied about 5.3%. One of the key reasons for my bullish late November view was a clearing in the cloud of shit. I was right. I will be right again. I suggest you head the cloud of shit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.