A Technical Look At The Year Ahead

With non-existent volume in equity markets and only two lackluster trading days left in 2013, let’s not over-trade but instead look at what we may be able to expect in 2013 for U.S. stock indices from a technical point of view.

Each December the research departments of investment banks and brokers publish their detailed economic forecast for the upcoming new year, and with it most often a gutsy year-end forecast for stock indices.  I don’t envy those analysts, because nailing down a twelve month forecast with so many moving pieces (in an interconnected world now more than ever) needs lots of wind at their backs to put it mildly.

Looking forward to 2013, given the current market environment, what happens with fiscal and monetary policies both in the U.S. as well as in Europe could well shape the fortune of markets yet again.

For the above reasons, from a technical point of view I never set firm targets past the two to three month time-frame and any twelve-month/year-end levels I may have in mind are wildly moving targets.

Given the importance of both fiscal and monetary policies, the number one asset I will be watching again in 2013 is the U.S. Dollar.  The below chart shows the different asset classes, ranging from stocks, commodities and bonds to currencies.  While most assets have risen sharply since 2009, the U.S. dollar (purple line on chart) relatively speaking has underperformed dramatically and in fact displayed an inverse relationship to risk assets at times.

With all of that in mind, let me run through my three as well as my twelve month targets for the major U.S. stock indices: Dow Jones Industrial Average, S&P 500, Nasdaq Composite, Russell 2000.

Context Table – Four year rally tally (off the 2009 bottom):

DJIA: 100%

S&P 500: 110%

Nasdaq Composite: 135%

Russell 2000: 140%

The Dow Jones Industrial Average has roughly another 8.50% to go to reach its 2007 highs near 14200, which serves as my three month target.  Beyond that, given the re-test of the 2007 highs and the sharp rally off the 2009 lows, a 25% retracement of the rally off the 2009 lows is likely, which would get me to a year-end target closer to 12300.

The S&P 500 has roughly another 10% to go before it reaches its 2007 highs near 1575, which serves as the very high end of my three month forecast.  After reaching those levels I also expect it to settle in for a better breather and close the year nearer to 1350.

My more confident call on the S&P 500 for the first quarter of 2013 is 1520, which is a 23.80% Fibonacci extension of the June – September rally.

The Nasdaq Composite has already sailed well past its  2007 highs in part thanks to Apple Inc (Nasdaq: AAPL), but I do expect the index to revisit its 2012 highs near 3200 as my three month target.  By year-end 2013 I expect this index to have retraced a good portion of the 2009 – 2012 rally as well and settle closer to 2700.

Last but not least, the Russell 2000 looks potentially the most bullish for 2013 as it has routinely tested the 850 – 870 resistance area over recent years.  On a three month basis I see 900 as entirely reachable.  Beyond that for end of 2013 the 760 area should serve as good support.

Twelve month price targets for stock indices is no easy task to arrive at and my numbers above are mere moving targets, while my three month targets are what I will spend more focus on when trading kicks off next week.

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