Unlike most market forecasters, I’m liking how the investing landscape has shaped up in these first trading days of 2014. If the overheated rally of late December had just kept on going, it would have set up a fairly ominous sell off that might have a produced a material change in investor sentiment. The current round of the indices’ orderly backing and filling is quite welcome from where I sit.
A lot of hot money and highly underinvested fund managers that needed to “window dress” portfolios for a shiny year-end look are getting tagged by buying at the top of a major move and thus subjecting themselves to any pull backs. Manipulating the face of one’s holdings at the end of the quarter almost always carries a price if it means repositioning capital at the upper end of the long-term channel trend line. Such is the current case.
The writing on the wall was the historically high retail investor sentiment reading from the American Association of Individual Investors (AAII) survey, serving as a time-tested indicator of when to jump in and when to wait. I don’t selling lasting too long, but it will do much to cleanse the market of overzealous animal spirits that dominated the month of December and culminated in the parabolic move in Twitter (TWTR) shares.
As fourth-quarter earnings season gets underway we should see a resumption of the bull market take hold. The economic data points of the prior three months bode well for some high-profile upside earnings surprises, stock buybacks and some M&A activity that will keep a lively tape favoring the long side of the market.
My year-end target for the S&P is at least 2,100, or roughly 15% higher.