2012 Was a Good Year for the Markets. Expect Bullish Ways to Continue

Hope everyone had a wonderful conclusion to 2012. The new year is upon us and the markets are flirting with multi-year highs. There was a wall of worry for most of last year with economic concerns in Greece/Euro-zone, a slowdown in the US, a slowdown in China, Middle-east conflicts/concerns over the supply of oil and the Fiscal Cliff. In spite of all these worries, the markets had a historically great year with the ES E-mini S&P 500 up almost 14%. I don't see any reason to expect the first few months of this year to be any different.

Recent History has shown low volatility and positive price moves in the first couple months of each year. I favor buying the dips looking forward and I also expect new highs in the markets. One scenario to monitor is a retest the 2012 close on the S&P 500 (ESH13: 1420 | SPY: 142.41 | $INX: 1426.19). For now I will expect support around the 2012 closing price to hold. If support does not hold, meaning we see multiple lower closes from the 2012 closing levels, I will reconsider my bullish bias. That being said, I expect support to hold and I expect higher highs going forward.

The FOMC minutes from 1/3/2013 are worth mentioning as a potential area of concern for the bullish-minded. Some Federal Reserve members suggested that continuation of QE is dangerous and to consider ending QE3/QE4 earlier than stated in prior statements. We saw an immediate sell-off reaction in the price of Gold as a result. If these hawkish views gain support among more Fed members, the overall market would certainly see selling pressure. It is important to be aware of this scenario, but in my opinion, there is really little chance of that view finding consensus support. We are way past the point of no return in terms of loose monetary policies. Interest rates are at historic lows and they need to stay that way for the United States to continue to be able to finance its debt obligations, keep banks lending and keep mortgage rates low/stimulate the housing market.

It may be possible to keep rates low in the short-term, maybe even for the next couple of years, but low interest rates will not last forever. The idea is to weather the storm until the US economy can pick up steam; 1) more goods can be manufactured and sold, 2) employment conditions can improve, 3) more money can be generated, 4) tax revenues can experience gains, 5) the US dollar can be devalued so that Debt obligations are easier to pay off and 6) US exports can be more affordable to the rest of the world. This is the overall goal of the Fed and loose monetary policy is the game-plan. US debt is too high to consider tightening policy in the current economic climate.

My long bias in the markets will continue until there is a reason to believe that tightening is a reality or if there is a break in the recent seasonal trend of low volatility and gradual price gains.

We'll see.. for the moment I'll just say Happy New Year and good luck for 2013. More to come...