Too Many Holiday Treats for Investors

My stock market price performance models forecast a weak first half of 2014 for the U.S. stock market (Value Line Arithmetic Index as proxy for the broad stock market):

Probable Market Gain:                 2% to 3%         (Average since 1984 4.9%)
Probability of Breaking Even:    60% to 65%       (Average since 1984 73%)

(Click on graph to enlarge)

The U.S. stock market partied hearty during the second half of 2013, and it may be time for sobering up.  My models had made a strong positive forecast back in July for an 8% gain through the end of 2013 -- but the market rose a joyous 17%!  Many of the fears holding back the market simply evaporated:

Congress approved a budget and appears likely to avoid a debt default crisis.
The Federal Reserve 'promised' a very slow tapering of financial stimulus.
The economy continued to gradually improve.

Sadly, the stock market can't keep growing at a 38% annual rate forever, or at least that is what my econometric models say. The stock market, of course, will do whatever it will, and the rush of the Bulls could keep running for months.  I have a gut feeling that the party will stop pretty soon, quite possibly in bone-chilling January or dreary February. I have a hunch that I wasn't the only nervous investor who resisted selling in December in order to avoid paying 2013 income taxes on my 2013 gains.

Here is the short-term market indicator that I plan to watch: a plot at StockCharts.com of the relative performance of the S&P 500 versus a long-term bond fund:

http://stockcharts.com/h-sc/ui?s=IVV:IEF&p=W&b=5&g=0&id=p13375668178

When stocks start performing worse than bonds your worries are being confirmed.

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New basis for 6 month stock market forecasts

(Click on the graph to enlarge.)

Starting in January 2014, I'll post an updated performance forecast each month for the U.S. stock market that applies to the coming 6 months.  This is a big change for me -- up to now I have posted just in October and May.  Hopefully, the shift to monthly forecast updates will give a better sense of where my forecasting models expect the stock market to go.

I will continue to base my forecasts on the Value Line Arithmetic Index  which tracks the approximately 1,700 stocks that the Value Line Investment Survey follows and weights each stock equally.  Because of the equal weighting, the Arithmetic Index has somewhat less variation than capitalization-weighted indexes like the Standard & Poor's 500 or price-weighted averages like the Dow Jones Industrial Average.  Generally, the other market indexes move much like the Value Line Arithmetic Index, so the forecast given here should apply generally to most other market indexes as well.

The graph above is a sample of how the blog will appear going forward.  The December forecast is for an increase of  about 6% by the end of May, 2014.  Since the market has performed better than forecast for the past few months, a small and temporary pull-back in the next few months looks likely.

Please email me any thoughts or questions you may have.