First of all, this is NOT a prediction post. I used to post them for fun in the past, but that’s all they were…for fun. I’m not a big fan of predictions because 1) NO ONE knows where the market it going and 2) We are all allowed to change our minds based on the information the market gives us. As Scott O’Neil says: “We are not in the prediction business, we are in the interpretation business.” That being said, this is more of a general direction post and some “bigger picture” thoughts.
Over the next 2-3 years, I feel the Dow is headed to 20,000 and the NASDAQ Composite will retest 5100 (its highs from the year 2000). Before you jump out of your chair and say that I am too bullish, please read on. I am basing this theory on few things:
1) Liquidity – The recent market rally has mainly been based on liquidity, specifically the accommodative Federal Reserve policies and the low interest rate environment. I don’t see this changing anytime soon. As long as this continues, that leaves stocks as the best game in town.
2) Market’s Overshoot – It’s possible that we’re heading into a longer-term Bull Market Super-Cycle. If that’s the case, 20,000 could just be the beginning. Even if it’s not the case, this rally could overshoot, especially in valuation. Even though the S&P 500 is currently trading at approximately 16x forward earnings, keep in mind that it got to 30x in 1999.
3) Improving Conditions – The Bears scream that the ONLY reason the market is going higher is due to the Fed. That might be true. The positive side of me thinks it’s possible, just maybe, that economic conditions are getting better and will continue to improve. Remember two things that are almost always true: The world keeps getting better, but the people always think it’s getting worse.
4) Psychology – People HATE the stock market. Although investor sentiment is currently at extreme bullish levels, I think there is a big difference between what people say and do. The majority of potential investors that I speak to are horrified of the market and have ZERO interest in getting in (I will blog about this at another time). I think the market needs to get to these round numbers (as stupid as that sounds) to help erase some of the mental damage created during the last decade (2000-2010).
HERE IS THE BIG CATCH: EXPECT MORE VOLATILITY!
I don’t think this will be smooth sailing by any means. In other words, the market just doesn’t move up orderly and give people money. For you new investors, 2013 was an anomaly. Moving up 30% with minimal corrections is not normal. I am expecting a lot more volatility in 2014. I’ve spent a great deal of time studying big winning stocks from the past and prior bull markets. One thing they all have in common is they tend to create doubt and shake out the weak hands before heading higher. It wouldn’t surprise me to see the market down 10-12% at some point this year before rallying back and making new highs. Again, it’s just a possibilty.
I have no specific stocks to mention right now because entry point is VERY critical to me. There are many stocks that I feel can go higher, but I entered them at much lower levels. For example, when $TWTR was $45 on 12/9/13, I tweeted that it could double in 12-14 months. Although I still feel that it will get to $100 by 2015, it’s hard to recommend that people get in now without some sort of cushion. I’m just stressing the importance of a strong entry point so you can sit through some volatility and play out a bigger move.
Best of luck in 2014. It is possible that we could just continue to grind up higher, but I don’t think the market will make it easy for most participants. I guess the best way to sum up my views are: Long-term Bullish, but expecting increased volatility over the next 6-9 months.
I can be reached at: jfahmy@zorcapital.com.
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