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In Search Of A One-Armed Analyst

Daily State of the Markets
Monday, January 14, 2013

Good morning. A great many investors commit their capital to the markets according to their macro view of the world. Some focus on the U.S. and/or global economy. Some look at Fed policy and the direction of interest rates. Some prefer to spend their time on the fundamentals such as company earnings or valuations. While others like to let the charts dictate their strategy. However, at this point in time one can make an "on the one hand, yet on the other hand" type of argument on a great many issues.

Rarely is the bull vs. bear argument so strong for both sides on so many topics. For example, on the economic front the bears can point to the sagging consumer confidence numbers caused by the fiscal cliff debate/debacle, the increase in the payroll taxes that will take a bite out of paychecks, and the fear over the upcoming budget/debt ceiling, which is shaping up to be a doozie of a debate. As such, our furry friends suggest that the economy is clearly at risk.

On the other hand, the recent data in the areas of housing, autos, and manufacturing seem to fall in the "what me worry?" category. Therefore, the bulls contend that the economy is "doing just fine, thank you" and point to the recent highs in the S&P 500 as proof that the way forward looks pretty good. In fact, most economists agree that the second half of 2013 will see a pickup in economic activity around the world. And since the stock market tends to look forward and not back...

The next area of debate is Fed policy. While traders may be making a mountain out of a mole hill, the release of the most recent FOMC minutes has caused quite a stir. Recall that the minutes showed "some members" of the FOMC felt that QE could be reduced this year. And although Ben Bernanke has been adamant about the Fed being transparent, this caused some traders to rethink the QEinfinity concept. So, on one hand, the old saw "don't fight the Fed" continues to apply. And yet, on the other hand, if the economy perks up, the Fed may start pulling the punch bowl sooner rather than later.

Then there is fiscal policy. Feel free to insert an eye-roll and/or a long sigh here. The good news is that the children in Washington did find a way to not send the economy over the fiscal cliff. However, the 12th hour "solution" just set up the next problem as the government is slated to run out of money in the next month or so. Therefore, we should expect the political posturing, the name-calling, the finger-pointing, and the brinkmanship to take center stage again relatively soon.

One of the ten components of our Market Environment Model is the stock market's cycle composite, which combines the 1-, 4-, and 10-year historical cycles of the market. Again, we find a good news/bad news situation here. The good news is that the cycles suggest that 2013 should reward stock market investors. However, the bad news is that the cycles also point to a fairly stiff corrective phase to begin in the coming weeks.

The earnings picture also presents a mixed picture. The bears will argue that the current slow-mo economy is going to impact the growth rate of earnings, which will, in turn, cause investors to rethink the multiples they are willing to pay for stocks. However, the bulls contend that earnings comparisons are the easiest they've been in the last three years. As such, companies may continue to "beat the street" on a regular basis. We should note that we will get an answer on this question shortly as the earnings parade starts to roll in earnest this week.

And finally, there continues to be quite an argument on the state of the charts. On one hand, the bulls can point to the fresh bull-market high for the S&P 500 as well as the new all-time highs seen this week in the small- and midcaps. And if one takes a peek at a weekly chart of these indices, it is clear that the trend is the bulls' best friend right now.

But... the bears can quickly counter with a couple of non-confirmation arguments. First there is the fact that the DJIA and the NASDAQ have not (yet?) produced new bull-market highs. And second, the glass-is-half-empty crowd points out that the recent gains in the market have occurred on relatively low volume.

So, as you can see, there are a plethora of crosscurrents for investors to deal with these days. My thinking is that this may help explain the intraday volatility that has existed so far this year. But in any event, investors may need to take a stand on any number of issues when investing this year.

What's my take, you ask? While I could certainly yammer on about my views on any of the topics listed above, I prefer to take an opinion-agnostic approach and let our Market Environment Model and our trading rules guide my decision making. I know, I know, this is an uber boring approach to the prediction season. Sorry, but that's just how I prefer to play the game.

Turning to this morning... The report that Apple has cut production in response to weak demand for the iPhone 5 put a damper on the early mood in the last hour. Despite a big gain in China and more signs that Japan will take steps to boost the economy, the Apple news has caused the NASDAQ futures to take a dive, which, in turn, has pushed the S&P futures slightly into the red.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: +3.08%
- Hong Kong: +0.64%
- Japan: closed
- France: +0.38%
- Germany: +0.47%
- Italy: +0.03%
- Spain: +0.13%
- London: +0.07%

Crude Oil Futures: +$0.36 to $93.92

Gold: +$11.80 to $1672.40

Dollar: lower against the yen and euro, higher vs. pound

10-Year Bond Yield: Currently trading at 1.835%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.25
- Dow Jones Industrial Average: -9
- NASDAQ Composite: -14.10

Thought For The Day...

For every minute you are angry you lose sixty seconds of happiness. -Ralph Waldo Emerson

Positions in stocks mentioned: none

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