As I discussed at the end of December, I felt strongly that the market would have a double–digit gain during 2013. Given the performance so far this year, this does not seem too hard, as the S&P 500 could make it back to the all–time highs of 1,576 sometime this year. That is just 4.2% below current levels.
The weekly NYSE Advance/Decline chart that I discuss later does not show any signs of a major top, but that does not mean we won’t see some very sharp corrections during the year. In fact, I expect it. I think the yearly S&P 500 charts and the 2012 performance chart of SPY I featured recently make it clear that one can not afford to be complacent at any time.
There are plenty of economic and political hurdles that are likely to make the market nervous this year. The Euro crisis has been on the back burner recently, as the sentiment toward the Eurozone has certainly changed. The sharp rally in the euro has clearly helped, but the region has not yet solved its problems.
It was another week of mixed economic news. On the positive side, durable goods orders and the Dallas Fed Manufacturing Survey were both considerably better than expected. Also on the manufacturing front, the Chicago PMI came in at 55.6 while most were expecting just 50. This encouraging data was in line with Markit’s US Manufacturing flash report featured last week.
On the negative side, Consumer Sentiment took a dive to 58.6 from the prior month’s 65.1, which caught many forecasters by surprise. The chart shows that the prior lows and the uptrend have been broken, but higher stock prices could help stabilize the sentiment next month. The GDP was also negative at –0.1%, while most were expecting a 1% rise.
There is a much lighter schedule this week, with factory orders on Monday and the ISM Non–Manufacturing Index on Tuesday. On Thursday, we get the weekly reading on jobless claims, followed by productivity and costs and international trade on Friday.
What to Watch
The strong close Friday and for the week has taken the S&P 500 up to my target zone of 1,500 to 1,520.
The “Wall of Worry” that faced the market in early January has disappeared, but still the market remains very resilient. A two–day correction is the most we have seen. The jobs report could have been a catalyst for a sharper pullback, but there is little in the way of regular reports to worry about this week.
According to AAII, the bullish sentiment of individual investors backed off a bit last week, dropping to 48% from 52.3% the prior week. The percentage of bears was unchanged. The number of bullish financial newsletter writers rose slightly to 54.3%, with the bears unchanged at 22.3%.
I continue to be cautious at current levels. In last week’s update of the Charts in Play Portfolio, I gave several more levels for suggested profit taking in individual stocks. Now more than ever, I hope that you will pay attention to the 5 Rules for Success in 2013, with particular attention paid to the entry level and risk on any new positions.
I continue to find a number of stocks that have are just coming out of four–to–six–week trading ranges where the risk can be well controlled. There are not nearly as many now as there were six weeks ago.
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