The DJIA is at a record high through Wednesday’s close. The S&P 500 is just 0.5% shy of setting a new record. This good news is accompanied by a preponderance of upbeat forecasts for 2013. Others (not ITR Economics™) are also forecasting an even better 2014. When all seems right with the world, it is time for you to worry. Specifically, we think it behooves you to be cautious about your expectations on how much higher these stock market indices are likely to go.
It has already been a better-than-normal rising trend in the S&P 500 with the Index up 122.9% since the crater in prices four years ago (February 2009). It would be wonderful to tell you that this great rising trend can extend a lot further; but we don’t think it can. We aren’t trying to time this market. However, given what we are seeing (mild recession in 2014) is would be imprudent to simply assume even higher share prices ahead.
In previous blogs we have mentioned the need to watch the Housing Starts rates-of-change for signs of decay. We already have decline in the bond market, and the ITR Leading Indicator™ may have peaked in January 2013. The likelihood of seeing decelerating rise in Retail Sales is high given the tax increases put through by the federal government. Throw in some concerns we have about the economic impact of Obamacare and you have grounds to reasonably think that corporate profits in 2014 will not be able to outperform 2013 (which are projecting to be a good year).
If corporate profits aren’t continuing to rise, then the only thing left holding up the stock market is the loose monetary policies of the Fed. That is not a good enough peg to hang your financial hat on. Start taking your profits off the table and set trailing stop loss orders for those long positions where you don’t want to exit the market just yet.