January 03, 2013 at 09:49 AM EST
My Near-Term Outlook for the Market as We Start 2013

Outlook for the Market as We Start 2013The S&P 500 had a pretty good year in 2012, up approximately 11.5% not including dividends. But, as is the norm in the current stock market, trading action remained choppy without any real trend.

The S&P 500 began 2012 strongly, rising consistently until May, when the index gave up all its gains. Then, with equal fervor, the S&P 500 moved solidly higher until September, before consolidating and pulling back on worries over the fiscal cliff. A lot of Wall Street analysts are saying to sell the current mini rally; but I’d wait until we get a look at fourth-quarter earnings to determine whether this turns out to be worthwhile.

There’s been quite a bit of consistency in the performance of the S&P 500 index since the stock market broke out of its low, set in March 2009. Solid rallies are met with solid retreats. The stock market advances, and then consolidates for a gain for the year. The year 2013 is likely to yield the same kind of trading action for the simple reason that investment risk is so high. The eurozone is in recession, and U.S. economic growth is really low. China and other Asian countries are export-driven, so their economic news shouldn’t surprise to the upside. Featured below is a three-year chart of the S&P 500 index:

$SPX S&P 500 large cap index stock market chart

Chart courtesy of www.StockCharts.com

The next major hurdle for the stock market in terms of policy action (or a lack thereof) is related to the debt ceiling. Previously, the stock market experienced a mini correction after policymakers were unable to extend a government shutdown due to the rising deficit. But very soon, we’ll be into fourth-quarter earnings season, and the numbers can’t come soon enough. So far, the few earnings results we’ve already received have been quite good, with brand-name businesses beating consensus.

Underperformance in terms of earnings results is likely to come from resource-related companies. Gold, silver, and oil were soft in the last half of 2012, and costs, especially among precious metals producers, are rising steadily.

If the financials report good numbers, which is what I expect, then I think the stock market will experience a strong start to 2013. The S&P 500 is fairly valued, given the earnings outlook and consistent and strong dividend payments. (See “Technology and Financials—Exactly What the Stock Market Needs to Test Its Five-Year High.”) This year, the risks include all the usual suspects: the sovereign debt crisis in Europe, political gridlock in Washington, war in the Middle East (possibly Iran), and the hegemony that China is becoming. All in all, the picture hasn’t really changed.

The S&P 500 index is now very close to forming the right shoulder of a traditional head-and-shoulders technical pattern that began at the start of 2007. This S&P 500 stock market chart is ominous, because the pattern itself looks like the index could retreat to a support level around 800. Anything is possible these days, but a shock to the system isn’t likely to come from corporations, which, for the most part, have healthy balance sheets. This year, a potential shock would more likely be related to sovereign debt problems or another war. Regardless, the interest rate cycle still favors the stock market and the S&P 500—at least over the short term.

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