Why Markets Could Go 15% Higher Before Anyone Realizes They Are Overvalued

Includes: DIA, QQQ, SPY
by: Jason Cimpl

The market took out 1225 resistance at the open, but the bears showed up and took the market lower into the close. It looks like the bulls are running low on gas in the short-term, but the trend remains positive. Robust fundamentals and poorly allocated fund managers should push the market higher in the coming weeks.

Although last week's jobs number was a let-down, U.S. economic data has been good over the past quarter. Data from manufacturing and consumer spending was particularly good recently.
Consumer confidence is at its highest level since May. And the November shopping sales were successful. Major retailers in the U.S. reported a 6.5% increase in sales from the same period last year. Parts of Europe are also recovering, like Germany where unemployment is at an 18-year low and Nordic countries like Norway and Sweden are enjoying solid growth.

The increase in activity from developed economies should result in more retail purchases which should result in an inventory build. Asian countries benefit the most from such an increase because most retail goods are produced in Asia. Already, the success of the U.S. holiday shopping season caused t
he Asian Development Bank to raise its current year forecast for growth in Asia to 8.6%, rather than 8.2% to account for a likely inventory buildup. That growth comes at a cost. Demand for goods from the U.S. raises the price of the goods in Asia where those economies are already fighting inflation.

Additionally, the market is going to go higher because no one is selling. Mutual fund managers are under-allocated and need to keep buying at high prices, which pushes the market higher, and that causes other managers to buy at even higher prices, and so on. The primary reason that most fund managers are so eager to buy into the market is because there are no other alternatives. Ultimately, this pace of accumulation is unsustainable, but the market can easily go another 15% until everyone realizes it is overvalued.

While the indices can push higher this month, I expect limited upside as SPX contends with 1225 resistance. Volume dried up Wednesday, which shows there is limited interest to buy at this level. The market needs to come down and regroup in the 1210 area before a healthy move higher.

Although I have reservations about the near term, the portfolio is positioned long and has been since the last week of November. I intend on adding to positions again on a pull back, but we have a few plays to make should the indices rally hard in the short-term. I would prefer to see more consolidation before we soar higher, but in marketplaces that are manipulated as much as this, I rarely get what I want.