@theMarket: The Blame Game

If it wasn't such a national embarrassment, the finger pointing going on among our so-called leaders would be comical. Nonetheless, it is March 1 and time is up. Bring on the Sequester.

Our congressional leaders made a big show today at the White House sequestration meeting. It was their first such meeting on the subject to date. I considered it a photo op at best. This week, rather than attempt a compromise, both Democrats and Republicans spent their time blaming each other for the Sequester.
 
From the GOP point of view, it is "the president's sequester" while the president is blaming the cuts on the Republican's failure to act responsibly. Since it was the Budget Control Act of 2011 that first authorized the Sequester, (if the bi-partisan "Super Committee" couldn't come up with a compromise solution to reducing the deficit), let's look at how the final vote panned out.

One hundred and seventy-four Republicans voted for the measure but only 95 Democrats. The final tally was 269-161 with just about all of today's GOP leadership voting yes. These are the same characters who now claim it was Obama's fault. All of this name calling is a smokescreen to hide an even more important deadline that occurs at the end of March.

On March 27, Congress will need to pass a "continuing resolution" (read short-term spending plan) or funding for the Federal government will expire. Yes, my long-suffering readers, without a deal between the two parties the government shuts down. Continuing resolutions are stop-gap measures that keep the lights on in Washington, absent a formal budget. We haven't had one of those in years because of political partisanship.

The threat of a shutdown actually will force Congress to act since, unlike the more subtle and slower-paced sequester cuts, a total shutdown of the government would be highly visible and extremely disruptive. It would not be pretty. Either congress will agree to keep the sequester cuts as is or it will have to come up with an alternative set of revenue increases and spending cuts.

In the meantime, both parties will have had almost a month of dealing with irate airline passengers, defense contractors, various agency heads, parents of Head Start children and the like. So this week's failure to compromise is simply setting the stage for a bigger cliffhanger, much more drama and, I suspect, heightened volatility in the stock market.

Readers may have noticed that over the last two weeks volatility has escalated among the averages. We will most likely see more one percent up and down days as March unfolds. Washington seems to be providing the justification for the pullback I have been expecting. So with headwinds strengthening, one wonders just how long the markets will be able to shrug them off. But let me be clear: I don't expect a market route, simply a nice pullback that stocks sorely need in order to advance further this year.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Inch by inch

@theMarket: Not If, But When

On the technical front, more and more indicators are flashing warning signs. The markets look extended and investor sentiment points to extreme bullishness. Those are usually signals that we are due for a sell off.

That does not mean that the markets won't go higher but the higher the averages climb without a pullback, the sharper the decline will be when it does occur. Remember too that pullbacks are good for the markets. Two steps forward and one step back is the rhythm of just about everything and the markets are simply a reflection of that fact of life. We have had a good run over the last few weeks and the averages are close to historic highs for good reasons.

The traditional Christmas rally was postponed last year because of concerns over the Fiscal Cliff. Prior to that, in November, some investors vented their disappointment over the re-election of President Obama by selling the market. They were convinced that without Mitt Romney, the world would come to an end.

As a result, since the beginning of the year, many investors have been playing catchup. As predicted, once the Cassandras had been proven wrong on tax hikes, spending cuts, the growth of the economy, the debt limit and whatever else they were fretting about, the bears have been making up for lost time and have been throwing money at stocks hand over fist.

As I explained last week, we may also be seeing the beginnings of a shift out of U.S. Treasury bonds and into stocks over the last few weeks.

All of this good news has kept the markets propped up. I expect that enthusiasm will continue over the very short term, but somewhere up ahead lies the possibility of a correction of up to 10%. That might sound like a lot (and it is), but those kinds of corrections normally occur once or twice every 12 months or so. We are overdue for this one.

“Should I sell now?” asks a client.

My answer depends on your circumstances. If you know that at some point over the next few months you will need to raise cash for college tuition, a new roof, an auto or other big ticket purchase, then it probably makes sense to take some profits now and make sure you have the money available for when you will need it.

On the other hand, if it is simply fear and greed spurring your desire to sell, I would advise against it. I have never met anyone who can consistently sell at the highs and buy back at the lows. The majority of times, those who try lose more money than they make.

“So I'm supposed to just sit here and take a 10 percent hit?" the client asks.

My answer is yes. The next thing longtime readers will point out is that over the past few years I have taken action on many similar declines. Why not now?

If I thought that something serious was lurking out there in the bushes, something that could drive the market down a lot further than 10 percent, then I might advise you to step to the sidelines. But I don't see anything like that.

Europe is recovering, not failing. The Fed is easing and the government appears to be getting its act together. Globally, I see more growth ahead. No matter how much I beat the bushes, I just don’t see the kind of dangers that we have had to navigate over the last few years.

There is no way of telling when a correction will occur. We could easily gain another 4-5 percent before it occurs and there is no guarantee that if it does occur it will turn out to be 10 percent. It could be less, a lot less. In which case, selling now will be an exercise in futility. My advice for most investors is simply weather the decline if it occurs. I have a strong feeling that the markets will ultimately make back any losses they may incur and then some.

@theMarket: A Rising Tide

That old saying, "a rising tide lifts all boats" certainly applies to the stock market this month. It appears that more and more investors are abandoning the bond market and finally embracing equities. That spells further upside.

Last week, U.S. investors moved a net $3.8 billion into equity mutual funds. The week before that $7.5 billion in new inflows were recorded along with over $10 billion invested in exchange traded funds. That's the best two-week inflow into equity in 13 years.

Over the last few years, I have kept tabs of the money flows in and out of the stock market. We have endured 22 consecutive months of outflows from the equity market. That money went into the bond market, CDs and checking accounts. Many of those investors did well by investing in U.S. Treasury and other bonds, since interest rates continued to fall while fixed income prices rose. They were convinced that equities were going to plummet at any moment. It didn't happen and now, thanks to the record low rates of return offered by these safe havens, investors may be embracing risk once again.

I have often said that as long as money was flowing out of the stock market, volatility would continue to increase while the probability of making new historical highs in the averages would be slim at best. The S&P 500 Index is up about 120 percent from the day I urged investors to re-enter the market back in March of 2009, and we are now within 5 percent of regaining the historical highs of 2007 in most of the averages

We need an expansion in volume and a wave of new buying in order to push us over the top. As I have said, a great many retail investors have sat on the sidelines through this four-year rally. It appears that they may now be moving out of their bond holdings and back into the stock market providing the fuel we need for further gains.

The contrarian in me worries, however, that if we do see the retail investor return to stocks, it may signal an approaching top to this four-year bull run. There have been times in the past, most notably the rush into technology stocks back in 2000, where the retail crowd has jumped in at the absolute worse time. I don't believe that the retail investor is always wrong. There have been plenty of times that the common sense approach of the individual has trumped the hedge fund mentality of most professionals.

The market's grind higher this week was that much more impressive given the earnings disaster of one tech company that, until recently, was the apple of most investors' eyes. I recall warning readers last summer of the high, in fact, impossible valuation that the market was awarding this company. Unfortunately, few readers took my advice to sell.

Stocks are overextended and could have a minor pullback at any moment, but overall I expect the markets will continue their winning streak through the end of the month and beyond. Underlying the averages, I have been seeing a lot of sector rotation where traders are selling the high flyers and buying the laggards. That is also happening overseas where emerging markets, for example, have been subject to profit-taking this month. I would use these pullbacks to add to positions.

@theMarket: January Could Be Important

Now that the Fiscal Cliff is behind us and the spending battle is dead ahead, investors are wondering what lies ahead. Historically, the market's performance in January has been important. Since it is a good signpost for the future over the last 60 years, let's examine some of the indicators that many professional traders use.

Many investors look to the first five days of January as a gauge of where the markets are going for the rest of the year. During the last 40 years when those five first days were gainers, the markets were up for the entire year 85 percent of the time. For example, last year the S&P 500 Index gained 1.2 percent in the first five days of January. As a result, the S&P 500 Index was over 13 percent. That was close to the historical average. Over the last 39 years, the markets gained an average of 13.6% when the first five days of January were gainers.

Conversely, when the first five days are negative the markets were down for the year, but only 47.8% of the time. The indicator therefore, does not work as well on down periods. Readers should be aware that, in general, during post-election years the markets have not done well. Only 6 out of the last 15 post-election years saw gains in the first five days of the year. It looks like 2013 will be an exception.

Building on the first five days theory "where the S&P 500 goes in January, so goes the year" is the most widely used barometer traders follow and with good reason. Over the last 62 years (since 1950) this indicator has been accurate 88.7 percent of the time. Down Januarys invariably ushered in a new or extended bear market, a flat market or at least a 10 percent correction. The average loss for those years was 13.9 percent.

I guess the only good thing good to be said for those down years is that they were great buying opportunities since invariably the year after saw significant gains.

There is also something called the "January Barometer Portfolio," which is made up of the S&P's three best performing sectors in January. If you invested in them and held them through the February of the following year, you would beat the S&P Index on average by 1.4 percent. Finally, Januarys have been the best month of the year for NASDAQ performance consistently since 1971.

So here it is Jan. 4, the last day of the market week and stocks are up. So far, if the indicators hold, 2013 promises to be an up year for investors. I agree with that assessment. But that doesn't mean that everything will go straight up.

Now that the Fiscal Cliff is behind us, we face a long litany of worries. The battle over spending cuts has begun. We will see the debt ceiling reached very soon. The government will run out of money (again) by the end of February. Without a deal on spending, the drastic cuts in defense and entitlements trigger on March 1. That would hurt the economy. And in the wings, the credit agencies are waiting to downgrade our government debt once again unless a real effort is made to address the deficit.

Make no mistake, my readers, we will continue to be thrown between hope and despair by those fools in Washington. But markets normally climb walls of worry. My advice is to ignore the noise in Washington. Keep your eye on what is important— the growth in the economy. Those of you who followed my advice in November stayed invested, expected a last minute deal of the Cliff and were rewarded for your patience and perseverance.

I am waiting like everyone else to see what the rest of January brings. Until then, I will ride the ups and downs while continuing to buy any dip especially in emerging markets, (including China), emerging Europe and Europe overall. Hang tough and see it through until I say otherwise.