2013 Risk Assessment

As we prepare to ring in the New Year, all eyes are focused on the edge of the “Fiscal Cliff” as if the outcome of this single event will set the course for 2013 and beyond.

Granted, if our fearless leaders choose to do a full gainer off the edge of the cliff and fail to pull the ripcord in time, we will all plunge to our fiscal death.

But the markets are acting as if this scenario is unlikely. Although we have certainly seen increased volatility in the past couple of days, the market hasn’t broken its upward trend from its low on November 16. So until the final chapter of the Fiscal Cliff is written, the market will remain spellbound to the drama and react accordingly.

But what happens after the cliff is conquered? What is the risk assessment? In the short term I would expect a celebration rally.  But barring a new Washingtonian or European inspired docudrama; the market will eventually begin to take a sobering look at the economic facts.

The “Economic Cycle Research Institute” declared in September that the U.S. had entered a new recession in July, yet the market was too busy betting on the election to notice. Will an official recession materialize? Only time will tell.

While 3rd Quarter earnings were lackluster at best, the drop in revenues appeared to go unnoticed, again most likely due to the fixation on the election.

Unemployment dropped, but oops not really, because more people just stopped looking for a job.

If I had to put a name to the 2012 market I’d call it the “Year of the Drama Queen”(no offense ladies). So what do we do going forward?

As we enter into the 13th year of our secular Bear market the annual chart tells me the Big Bear is still in charge. Until we see a sustained break above 1550 on the S&P the Bear will continue to haunt us. Some analysts predict this Bear market will be with us until 2015 others predict 2020.

Elliot Wave Analysis suggests we will see a catastrophic market collapse before the Bear finally goes into hibernation with a 30% drop from current levels likely in the near term.

Charles Nenner Research Center also predicts this Bear market is far from over and the worst is yet to come.

I’m a bit more optimistic. If the oscillators maintain their current trajectory on the Annual chart I would expect a trend reversal within the next 3-5 years. Our last secular Bear Market lasted 17 years ending in 1982. Previous secular Bear markets lasted 21 years and 16 years.  If history repeats itself, I would expect another 50% market decline before this party is over.

Technical Analysis is not an exact science. Its predictive powers are questionable at best. Its real power lies in its accurate assessment of the past and present. When or if any of these forecasts materialize remains to be seen but it will be wise to stay cautious and keep a sharp eye on the market until this secular Bear is clearly behind us.

Since 2009, the Quarterly chart has been in an uptrend but it’s beginning to show the first signs of weakness. Quarterly chart oscillators move slowing so the uptrend can easily continue through 2013.

The Monthly chart oscillators have been flat since March after it’s rise from October 2011 and could be on the cusp of a down turn.

The Weekly chart is in an uptrend but headwinds from the Fiscal Cliff are apparent.

The uptrend in the Daily Chart is a little long in the tooth but the Fiscal Cliff may produce an entry point if we see a pullback.

Bottom line, I declare 2013 as the year of Vigilance!