INSIGHTS

On January 21, 2014

Viewpoints from AAM - Telltale Signs of a Healthy Market

Some skeptics have made the argument that the stock market ran fast and furious in an untethered surge to record heights in 2013. However, nearly half of last year’s market action played out in an extended consolidation channel that addressed its speedy climb during the first five months of the year and subsequently established the technical springboard for the fourth quarter rally. Although the new year has begun with saw tooth trading excursions, I believe that 2014 is actually perched on a healthy technical footing with scant speculative price movements, a continuation of broad and diverse sector leadership and an ongoing knack for policing excesses with occasional down-and-dirty episodes such as those sustained January 2 and 13 that checked and re-checked support above the DJIA 16,000 level.

One telltale sign of a healthy market is its low reactivity to daily headline news. Without question, headline risk has presented a potential headwind for equities from both micro and macro standpoints. The stock market has demonstrated unrelenting elasticity by not only withstanding challenging news items but actually flourishing with a succession of all-time record highs. From a micro standpoint, consider that two of the better-performing categories last year were health care and aerospace/defense. Not bad, considering the anticipated trepidation surrounding the Affordable Care Act (“Obamacare”) and the anxiety over the proposed budget cuts for the Pentagon. A market that generates persistent trends may be predictive. In this case, I believe that the market is telegraphing economic glad tidings that overshadow Fed tapering, Obamacare or budget battles in Washington. The market’s bullish market patterns have prevailed for years but have been routinely denied by many. I suspect naysayers will surrender in numbers before this cycle is completed. Awaiting that elusive big correction from the sidelines may be a frustrating strategy. Better, perhaps, to adopt an investment plan of dollar-cost averaging that is based on calendar dates rather than difficult-to-predict stock pullbacks.

I do not anticipate a change in leadership this year. To the contrary, current leadership stocks and sectors seem to be strengthening. This underscores the established patterns in the market and argues against selling well-performing stocks too soon amid near-term general market volatility. In my estimation, some of the most exciting days for market bulls still lie ahead. My market assessment has me upbeat about the upside potentials for stocks, begging the question, might we be on the threshold of an economic revival with far greater growth prospects than some economists currently predict?

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