Time to Go Against the Key Stock Indices?

By Moe Zulfiqar

Trading for 2014 has begun. In 2013, we saw massive moves on the key stock indices—something we have only seen a few times. For example, the S&P 500 moved up by almost 30%, and the NASDAQ Composite increased by more than 35%. Those who were long saw their portfolio grow, and those who went against the key stock indices probably had to question their strategy and re-allocate the capital.

You can see for yourself in the chart below: key stock indices such as the S&P 500 maintained an upward trajectory throughout the year—and without any major hiccups.

Chart courtesy of www.StockCharts.com

The average return on the S&P 500 between 1970 and 2012 was 8.2%; on the Dow Jones Industrial Average, it was 7.9%; and on the NASDAQ Composite, it was just slightly more than 13%. (Source: “Historical Price Data,” StockCharts.com, last accessed January 2, 2013.)

Sadly, these numbers only indicate past performance. With the beginning of the new year, investors have one main question in mind: where are the key stock indices going to go in 2014? Will we see a decline or are we in for another stellar year?

The year 2014, I believe, is going to be an interesting year for stock investors. The rally in the key stock indices that started in 2009 continues to march forward. As this is happening, the fundamentals that act as fuel for the stock market rally are becoming anemic. This should be noted, because without fundamentals becoming stronger, key stock indices can only go so far.

For instance, on the surface, the U.S. gross domestic product (GDP) looks better than before, but the factors driving it higher are nothing to be proud of; instead, they’re troubling, to say the least. In the third quarter, we saw a massive buildup of inventories—this suggests that U.S. consumers are not really buying, yet consumer spending is the backbone of U.S. GDP.

Adding to this, we continue to see troubles in the housing market. The demand from buyers continues to plummet as the interest rates are increasing. This is very evident when looking at the mortgage activity tracked by the Mortgage Bankers Association. The index tracking mortgage activity in the U.S. economy dropped to a 13-year low near the end of December. (Source: “U.S. mortgage applications fall as refinance hits five-year low: MBA,” Reuters, December 24, 2013.)

Is it time to go against the key stock indices?

With all this said, investors have to keep one very important phenomenon in mind: predicting tops and bottoms can kill an investor’s portfolio returns; markets can be irrational for some time. The best strategy is to act with the market, which is currently in an upward trajectory. January is usually a good month for key stock indices. We will see how it pans out once we move further into the year.

This article Time to Go Against the Key Stock Indices? was originally published at Daily Gains Letter