@theMarket: From One Fed to Another

What a week it was! The U.S. central bank marked the end of its quantitative easing, while promising to keep interest rates low. On the other side of the world, the Japanese central bank did the opposite. Its Fed increased the amount of stimulus it will add to the economy from $600 billion to more than $730 billion per year.

Oh, and by the way, the U.S. stock market loved the news. The S&P 500 Index climbed to within a hair's-breadth of its historical high while the Dow actually made a new intra-day record. It is good news if you are a global investor, which I am. More stimuli, wherever it may be, actually enhances global growth and that's good for us. Despite those who criticize the Federal Reserve's quantitative easing efforts since 2009, these actions have not only carried this economy back from the brink but set it up for further growth in the future while sending our stock markets to record highs.

That has not happened elsewhere because central banks worldwide have failed to emulate the Fed's actions. Europe, as I have often said, is struggling because their central bank cannot develop consensus among its EU members to do what it takes to put Europe back on firm footing. Japan, on the other hand, is a horse of a different color.

They have taken the U.S. Fed's playbook and ran with it. Their first QE project, announced almost two years ago, began the herculean effort of pulling that island nation from a 20-year economic funk of no growth and deflation. That was a good start, but similar to our own QE I, it's not enough to do the job. Yesterday, their central bank announced further stimulus, call it QE II, which vaulted the Nikkei stock market over 5 percent on the news.

If you have been reading my columns over the years, you know that I first recommended Japan as a long-term buy back when the Fukushima Crisis had devastated the country ("Japan: The Sun Is Beginning to Rise" June 2, 2011). At that time, the Nikkei was at 9,955. The Nikkei now stands at 16,413. Investors who followed my advice have made about 65 percent on their investment. So what's next?

Japan's stock market should continue to climb. My mid-term target for the TOPIX, which is the Tokyo Stock Exchange's price index, is1,750 which is a 26 percent gain from its present level. That's not too shabby, but don't neglect the U.S. market either. After sounding the "all clear" in my last column, U.S. markets have continued to climb. I expect those gains to continue through the end of the year and into next year. Why?

The economy is growing. I believe that growth will surprise you on the upside as events unfold. Although we still need to do more work on the labor side, especially in seeing more full-time jobs and pay increase, consumer spending is starting to come around. The fact that energy prices have dropped precipitously will help out on the spending end as well as in the months to come.

If I am right, after mid-term elections, we may finally see those do-nothings in Congress actually get to work on a new economic stimulus plan. Call me a cock-eyed optimist, but I am actually hoping for compromise legislation out of both parties. All-in-all, the picture I see unfolding in the months ahead is quite positive. Have a Happy Halloween.

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: Tea Leaves and Crystal Balls

Given that the New Year is just around the corner, brace yourself for a barrage of Wall Street predictions. Investors love to read them, despite the fact that the vast majority of forecasts will be proven wrong. Last year, I was lucky and spot on with my bullish forecast, but 2014 could be different.

 First, the good news, the economy and employment will continue to grow. Despite the naysayers, the quantitative easing by the Federal Reserve Bank over the past several years was, in my opinion, a success. In 2013, we began to see the fruits of their labors. I believe the strength of the stock market this year was fueled by the gathering strength of the economy and not by what the Fed would or would not do.

Unemployment will continue to fall and will drop to below 6.5 percent by the end of 2014. The strength of the economy will mean an increase in hiring by the nation’s businesses and corporations. Wages will begin to climb for workers and profits will expand among employers.

As a result, the stock market will continue to make gains, although not at the pace of 2013. Declines this year were short and shallow. Every time the markets dipped, buyers took that opportunity to add to their holdings. The S&P 500 Index made it through the year without once experiencing a 10 percent decline. The dazzling strength of the stock market disappointed those who were waiting for a serious pullback before entering the market.

It won't happen like that in 2014.

I suspect that somewhere at the end of the first quarter or into the second quarter, we will see a substantial stock market decline of the 15-20 percent variety. Now, folks, this will not be the end of the world nor should you treat it as such. It will simply be a much-needed correction within a bull market.

The second year in an election cycle has always been a bad one for stocks, and there is a lot riding on elections in 2014. At the same time, if markets continue to advance, valuations will become stretched and the chances of a big sell-off will grow higher and higher.

Interest rates will also continue to climb in 2014. This year was the turning point for bond investors. The thirty year bull market in bonds is over and the next several years will see declining values in bond portfolios and higher and higher interest rates. It may well be that as the Fed begins to taper in earnest next year; interest rates could climb high enough to spook the stock market, causing the sharp selloff.

The good news is that I expect all the potential losses that stock investors would incur under my 2014 scenario could well be made up by the end of next year. It may well be that the market's 2014 gains could be around the historical norm, about 7 percent, when all is said and done.  

As most of my readers and clients know, I will not sit idly by in the face of such a selloff, if it should occur. Unlike this year, where my strategy was to buy and hold, next year will require a certain amount of adeptness in first selling and then buying back equities for some of you. For those longer-term players who are willing to do nothing, you can expect, at worst, some paper losses that will be made up by year-end.

Remember too, that we are in a secular bull market. As such, next year's decline, if it occurs, would be merely a speed bump in the grand scheme of things. I fully expect the stock market to continue to make gains beyond 2014, possibly as high as another 60-80 percent. So the best New Year's resolution you could make in 2014 is to stay with stocks for the foreseeable future.

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: Fed Saves the Santa Rally

This week the Federal Reserve Bank announced it would begin to taper in January by $10 billion a month.  Most investors expected the markets to drop on the news but the opposite occurred. Why?

One reason is that investors abhor uncertainty. The Fed's announcement this week that they plan in January to reduce their $85 billion a month bond purchases by $10 billion removed a major psychological barrier to the market's advance. Investors now have a game plan on how and when the Fed will reduce their monetary stimulus and can adjust accordingly.

I commend the Fed and outgoing Chairman Ben Bernanke. They handled what could have been a dicey situation adroitly. Bernanke, in his press conference after the FOMC meeting, managed to simultaneously reassure investors that interest rates would remain low, while focusing their attention on the growing strength of the economy. Since then the markets haven't looked back.

So does this week's event change my short-term attitude toward the stock market? I was expecting a decline in the averages. My first stop was the 50-day moving average. We hit that mark and bounced. Many of the indicators I watch are still pointing toward caution but others have turned positive again. I won’t fight the tape and will instead give the market the benefit of the doubt here.

Clearly, the Fed delivered the rally that Santa Claus couldn't. I would expect the market to remain volatile but still maintain its upward trajectory into the New Year and possibly beyond. Given that I had recommended that investors stay long the market, despite any short-term declines, no harm was done. We can all enjoy the next few weeks of upside, but I do apologize for any undue stress I may have caused readers by predicting an imminent decline.

Wall Street winds down beginning next week through the beginning of January. It is a time when low volume allows smaller trades to have a larger impact on prices and we should expect increased volatility.  Maybe we run up, maybe we come down, or maybe we just chop around, but without the big players the market behaves far less predictably. Once again, I advise clients to ignore any short-term moves.

I will mention that we are only weeks away from another stock market phenomenon called the "January effect." At year end (actually starting on the last day of December) through the fifth trading day of January small-cap stocks have tended to rise substantially. The effect is explained by the tendency of investors to first sell these stocks to create tax losses or raise cash for the holidays. This selling drives down prices far below their fundamental worth. Bargain hunters then move in and buy quickly driving up the prices and creating the January effect.

Unless you are an adept trader, I would not recommend you play this game; but for those who may hold some of these small cap stocks, it is good to be aware of these trends.

 It's been a good year for all of us, and well deserved. I want to take this opportunity to thank you for your support and wish all of my readers and clients a very happy holiday season.

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: Coal in Your Stocking?

The bulls can't muster enough strength to push stocks to new highs. Bears lack the conviction to stage a meaningful decline. It appears we are in a stand-off, but for how long?

This year many of the yearly investments themes of Wall Street failed to bear fruit. The "Sell in May" crowd was mightily disappointed this year. Those who warned that September and then October would be terrible months for the market were also stymied. Today, it's the "Santa Claus" rally crowd. Many investors are geared up to make a stocking full of profits any day now. They may be in for disappointment.

One could argue that we have already had our Santa Claus rally. After all, the S&P 500 Index is up over 25 percent year to date. How much more do you want? I have been warning readers to expect a pullback. Many of the indicators I follow have been flashing amber lights and some have turned red.

Eight of the last 10 and 12 of the last 18 sessions have finished lower. That's called distribution but the losses have been so minor and the euphoria so strong that bulls have largely ignored that fact. Last Friday's jobs report were cause to celebrate. At first the markets did just that, gaining over one percent on the news. But here we are a week later and stocks have given back all of those gains.

Chart of the Day

The politicians in Washington had further good news this week. There won't be another government shutdown in the foreseeable future. Both sides have hammered out a budget deal, which, if passed by the Senate this week, should solve that particular problem at least through 2015.  It removes some of the cliff hanging drama the markets hate so much, but stocks barely moved.

Last week, I advised that if the S&P 500 Index regained 1,800 and remained above it for any period of time, the coast would be clear and this present distribution would have simply been another buy-the-dip opportunity. So far the bulls have not made their case. It is true that the S&P index jumped on the employment news last Friday by over one percent, but quickly broke down. And now it is below that level once again. We are below 1,780, which is another support level. I suspect we decline to 1,760, which is the 50 day moving average. That is my first downside target.

Hopefully, it will bounce from there, but if it doesn't, there is a possibility that we may test the 200 DMA. There have never been two years in a row when the S&P 500 Index did not decline to test the 200 DMA. But I am getting ahead of myself. Let's take it one support level at a time.  

Although all of this cautious advice I am spouting may lead readers to believe I am bearish, when in fact I am extremely bullish over the medium and long-term. It's just that right here, right now, the markets might Grinch us out. But once we go through this little digestion phase, the markets should resume its advance, at least until the end of the first quarter.

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: Good News Is Bad News

U.S. economic growth in the third quarter surged higher by 3.6 percent, while jobless claims plunged by 23,000 to 298,000 as layoffs slowed. That's great news, right, so why is the stock market falling?

If you are scratching your head about now, who can blame you? Americans have been waiting for years to see the economy finally transition from a slow, bumpy recovery with stubbornly high unemployment to something akin to more traditional economic recoveries. It appears we are finally hitting our stride but growth like this could mean the end of the Fed's open-ended quantitative easing, thus the decline.

Investors are afraid that the Fed may begin to taper as early as this month, given the good news. The implications are that interest rates would rise and the stock market would decline as the Fed withdrew support from financial markets. That's what you will hear and see in the financial press, but nothing could be further from the truth.

Let me tell you what is really going on. Don't listen to these pundits who worry about a stock market bubble, pointing to the Fed's easy money policy as the culprit. I disagree. The market rally, in my opinion, is wholly justified. It is based on expectations that the economy will pick up steam and unemployment fall. As I have said before, the markets anticipate events 6-12 months ahead of time. The market media has missed that fact. They are still harping about Fed easing/tapering when the data is telling us the gains are about the economy.

It is why I have been bullish all year and am getting increasingly bullish when looking at the future. The Fed's efforts to stimulate the economy have worked.

The private sector is now picking up the slack and the years ahead should see better and better growth not only here but worldwide. That's a long-term forecast consistent with my belief that we are in a secular bull market in stocks. However, that does not mean the markets will go straight up from here.

Two weeks ago, I warned investors that stocks needed a rest. We could easily see a pullback based on sentiment numbers, momentum and technical factors. Today, I remain cautious in the near term. I accept that there are factors that argue against a decline right now. Christmas is only three weeks away and the historical data suggest a Santa Claus rally happens more often than not. Investors have also become conditioned to buy the dip, no matter how small.

If the bulls can get the S&P 500 Index back over 1,800 then the rally continues and I'm wrong. But if the markets want to use good news as an excuse to drive the markets lower, so be it. I don’t care what triggers a decline; I only care that we need to consolidate gains before moving higher.

How low could we go? If I rely on technical data, we could easily fall to the 50-day moving average (DMA) on the S&P 500 Index. From peak to trough that would be a decline of a mere 3.5 percent. If the Fed does announce the beginning of a Taper this month then we might actually see a test of the 200 DMA. In that case, we're talking a decline of over 8 percent. I find it hard to believe that the Fed would take that action on the eve of transition with new Fed chief, Janet Yellen, taking the reins in January. In either case, a 3-8 percent decline in the markets happens several times a year. It would not be the end of the world and would simply set us up for continued gains into 2014.

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.