While we had a difficult week we must remember that we closed above an important technical support level and that signifies a pullback but not one to panic about. As any trader or student of the market will attest to, a pullback is a very healthy sign after a major up move. It’s a sign of health and reality to a market that without it would border on frothy and the last thing the economy needs now is a frothy market.
We would love to see indexes close below some of these near term support levels and find a new base down about five or eight percent from here. That would be justified and expected and allow people to re-enter the market at a level that they may perceive as better priced.
We have been stressing about budget problems in Washington and thankfully, that looks like it won’t be a major issue going into the New Year. The uncertainty about the Fed’s move on tapering may also be lifted this week and that can only be a good thing long-term.
Short-term, we will see some volatility but we don’t feel that will be too long lasting and if anything, could be a great buying opportunity.
Looking at the most recent inflows-outflows into U.S. based funds you would have to say that money is being taken off the table for the end of the year and most likely will not return so that could lead to more volatility as there are fewer participants in the market.
While December is tradionaly a very good month for stocks we don’t think that will hold true this year. Not that anything is wrong with the market we just think we have had an incredible move and many money managers will be locking in profits and ending the year on a good note. That selling will keep a lid on upward bias. Doesn’t happen often but there wont be any Santa Claus rally this year. Sorry Virginia.

All eyes will be on the Fed this week as we await their decision on tapering and their outlook on 2014. While we have said for months that we thing they should taper and get this over with. Let the market moan and groan and get on with it, we say. Leading economists have said that they feel the tapering will begin this month and last through the first quarter of next year and we will have to agree. The changeover in leadership at the Fed is one reason some site the lack of any move so far but we are in that camp that believes the Fed wanted better numbers across the board before acting, and they got them.
The Federal Reserve is not like any other government organization. They don’t worry about changes in leadership or political posturing. They look at the bigger picture and the longer-term picture and act accordingly. With that in mind they don’t fret over a change in chairmen or appointment of new governors. It’s about the economy and their stewardship of the economy and having Janet Yellin come in won’t delay the Fed from doing what it should be doing. Seamless transition is more important as long as the majority agree.

Putting the taper aside for a moment we have a boatload of data this week. Most importantly is the CPI. There are some that think we may be in the beginnings of a deflationary cycle. This won’t be good news and if you think things were tough before, wait till you see deflation.
We haven’t experienced a true deflationary cycle in decades and good thing because our economy and almost every economy on the planet is built on inflationary cycles and controlling them. There are many tools to control inflation should it get out of hand but few to deal with deflation.

Hopefully, the CPI number will show some inflation and this fear will be put to rest. For another month.

Industrial production, Housing Market Index, Leading indicators and the GDP numbers all will be watched closely for the health of the economy and possible directions for next year. However, it will all come back to what the Fed says on Wednesday.

We vote for start the tapering now!