Guest Speaker: Craig Johnson, Senior Technical Strategist, Piper Jaffray ~
Craig’s Key Observations:
- We have polished our crystal ball and peered intensely at the charts to see what lies ahead for investors in 2013. Overall, our findings are bullish and consistent with the bold call we made in August of this year for 2,000 on the S&P 500 by late 2014.
- The S&P 500 continues to make higher highs and higher lows and remains above an upward-sloping 40-week MA, but below a declining 50-day MA.
- We suspect any resolution of the U.S. fiscal cliff will likely result in the S&P 500 retesting its 2000/2007 highs at 1,550.
- The recent improvement in market breadth is a positive sign for equities in early 2013. In fact, our 40-week Technique, a measure of the number of our Groups above their 40-week MA, recently issued a “buy” signal.
- Despite the historical weakness of post-election years, we’d like to point out that under Democratic presidents, the first year of the election cycle has on average been the 2nd strongest year within the cycle, with positive returns 75% of the time. Therefore, we believe our current circumstances help underpin our call for a bullish 2013.
- We have often heard the Wall Street saying, “So goes January, so goes the year”. We analyzed this phenomenon over the past 83 years and found S&P 500 had posted positive returns 22 times in the month of January. Of those 22 instances, the S&P 500 posted positive annual returns 9 times, or 40%, with an average return of 13.6%.
- Our price objectives for the S&P 500, established in August 2012, are as follows: 6-month price objective of 1,550, a 12-month price objective of 1,700 and a 24-month price objective of 2,000.
Macro Thoughts:
- U.S. Economic Outlook: Low-Trajectory Recovery Underway—At this juncture, the weight of the evidence shows the U.S. economy is starting to improve, albeit at a somewhat tepid pace relative to prior recoveries. Furthermore, our sector relative strength work also supports this belief, as economically sensitive sectors continue to outpace the broader market.
- 10-Year Bond Yields—We believe 10-year bond yields achieved a secular bottom in July 2012 (1.38%). Looking forward into 2013, we suspect a combination of an improving U.S. economy coupled with a less draconian outlook for Europe and the U.S. will lead to less safe-haven buying of treasuries. Thus, we look for rates to rise toward 2.00%-2.25% next year, reversing the downtrend resistance line off the 2011 highs.
- U.S. Dollar—A weekly chart of the U.S. dollar index suggests the index is in the early stages of forming an ascending triangle. However, more time is clearly required before a topside breakout unfolds. We look for the dollar to remain volatile in 2013, but to trade directionally higher throughout the coming year, retesting the July 2012 highs($84) in coming months.
- Commodities—The CRB index has been making a series of lower lows and lower highs over the past two years. Based on our analysis of the CRB index chart, we suspect commodity prices could fall roughly 10% in 2013, as a retest of the July 2012 lows appears to be unfolding. Additionally, we suspect an improving U.S. economic backdrop will likely underpin the U.S. dollar, representing a meaningful headwind for commodities.
- Sector Overweight—Financial, Consumer Cyclical, and Healthcare
- Sector Underweight—Energy, Basic Materials, and Services
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