Inside The Stock Market ...trends, cross-currents, and outlook

January’s new breadth highs suggest new bull market price highs are likely some time in the next several months… but they can’t rule out a painful February.

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While the current market setback of –5.8% doesn’t qualify as an intermediate correction, it’s close enough to the threshold to warrant a quick review of what such a correction—and the ensuing recovery—might look like.

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While our tongue-in-cheek “Correlation Of Everything” measure has retreated from record levels, it remains far above anything seen prior to 2010.

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The industry price momentum effect - observable in data from the last several decades - has strongly reasserted itself in the last 18-24 months.

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Last month we suggested the top sector for 2013 would fall from grace in 2014, and the Consumer Discretionary stocks have been quick to cooperate in the last five weeks.

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Small Caps are close enough to a new relative strength high that it’s possible a final revision might be necessary before the Small Cap tide flows out.

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The last few innings of a cyclical bull market generally favor trend or momentum-oriented strategies, rather than mean-reverting ones like “Playing The Bounce."

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EM valuations look cheap in a stock market world that otherwise doesn’t. But even their “cheapness” bothers us.

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The emerging markets are in a much better financial position to weather any financial turmoil than they have been in the past.

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Gains will likely be modest, and secondary stocks could finish the year flat-to-down. The year will likely be marred by a moderate to severe mid-year correction, and Small Caps could easily suffer a 20% hit during that swoon.

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This year should be a solid but unspectacular one for the U.S. economy, with real GDP growth of about +2.5%. We expect the Consumer Price Index to rise just 1.5%. Unemployment should continue to fall.

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Earnings growth over the next few years will—in the  best case—be forced down to the rate of top-line growth (nominal GDP).

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Following a great year for trend-following, capitalizing on key reversals in sector performance will be important in winning the 2014 performance derby.

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While gold garnered most of the headlines last year (down 27%), commodities performed badly across the board in 2013. We expect more of the same in 2014.

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The January Small Cap bounce effect ain’t what it used to be, but extrapolating the month’s market action for the next eleven months is a “less bad” idea than any other time of the year.

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The investment leadership of a given year has historically had better-than-even odds of outperforming in the following year at both the asset class and equity sector levels.

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For 25 years we’ve tracked hypothetical industry group portfolios comprised of the previous year’s “Dreams” (20 best performers) and “Nightmares” (20 worst performers).

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What worked, what didn’t; what you need to consider for investing in Emerging Markets this year.

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The inflation-adjusted all-time high for the S&P 500 is currently 2061, a figure we think will be just out of reach for 2014.

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If a bear market is imminent, it will unfold with less “internal” forewarning than any cyclical decline since the late 1930s.

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