Market Outlook 2013 - Thoughts of a Professional Investor

By: Deric O. Cadora | Tue, Jan 15, 2013
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Coming out of 2012, a year which delivered an investment environment more difficult to navigate than any in at least the last five years, composing a forecast for the next year would seem to be a tenuous task. However, by recognizing the character of the action in 2012, expectations for 2013 clarify. Specifically, 2012 saw gold and oil working through massive consolidation periods, and since consolidation periods tend to separate trending periods, we can look forward to solid trends from these commodities once the patterns complete. Commodities in general also completed a corrective period which saw a major low form mid-year while equities extended an aging cyclical bull market.


Precious Metals Outlook

Following a parabolic run into its 2011 peak, gold began a laborious consolidation. Like the consolidations which followed the 2006 and 2008 runs, the current consolidation has endured longer than a year. In fact, given the magnitude of the rally out of the gold's 2008 low, the fact that the current basing period is set to exceed the 18 months required to complete the 2008-09 basing period is not surprising. However, once the pattern completes... entailing a test of the 2011 high... the yellow metal will be poised to embark on its next giant rally.

Gold Forecast 2013
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Gold's trending move should extend into mid-2014, an expectation which is derived from the dollar forecast, which as described below, calls for a major decline. Obviously, the previous few months have seen a number of periods during which the typically inverse relationship between gold and the dollar has broken. However, these anomalies are typical of consolidation periods. The normal correlation should return with full force once gold is in trending mode.


Dollar Outlook

The U.S. Dollar Index tends to set a major low about every three to three and a half years. With the last 3-year cycle low forming in 2011... entailing a decline which drove the parabolic moves in gold and silver... the next low is due in mid-2014. After a third-quarter plunge in 2012, the dollar index clawed out of its September low, and this labored rally should soon give way to an impulsive move lower as the 3-year cycle decline kicks into gear. In fact, the dollar tends to set at least a 6-month high or low each January, so the New Year's rally may prove to be not only the high point of 2013, but the high at least until the 2014 multi-year cycle low.

Dollar Outlook
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A dollar decline certainly makes sense from a macroeconomic standpoint in which the Federal Reserve is printing over one trillion new dollars per annum. And while other major central banks are certainly making efforts to devalue, a currency war will no doubt be controlled and "won" by the United States.


Crude Oil Outlook

Like gold, crude oil hashed its way through a major consolidation in 2012. Oil, however, is much closer to producing a breakout.

Crude Oil Outlook
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How far crude oil will rally in 2013 is impossible to know, but the 2011 high near $115 for West Texas Intermediate should be challenged, if not broken. Furthermore, the all-time high near $150 is likely to fall as the dollar moves into its 3-year cycle low in 2014.


Commodity Market Outlook

As may be inferred from the bullish forecasts for commodity bellwethers, gold and oil, as well as the bearish outlook for the dollar, the general commodity market should be trending higher throughout 2013. In fact, the CCI formed a major cyclical low in 2012.

$CCI Reuters-CRB
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The rally out of last year's low has taken pause while gold and crude oil complete their consolidations. However, the ascent of the new 3-year cycle should accelerate once the bellwethers are on the move, and the rallies should spread to other commodity sectors, as well. The CCI is expected to eclipse its 2011 high as the dollar sets its 2014 low.


Stock Market Outlook

With the dollar in decline, stocks should also find themselves on the receiving end of liquidity flow... at least for a time. The stocks market tends to conform to a 4-year cycle, and while the current multi-year cycle appears to be extending, stocks are ripe for a major peak. Much like the 2007-08 period, the equity market will likely keep its legs during the initial phases of a commodity rally. However, commodities should experience an acceleration of their rallies by early summer, and the pressure from higher input prices will eventually topple the cyclical bull in stocks.

Stock Market Outlook
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This cyclical perspective is supported by fundamentals as U.S. corporate profit margins are at a multi-decade high (eclipsing the previous multi-decade high set in 2007). Unless such margins are not yet fully reflected equity prices, profit margins would have to expand beyond already-astronomical levels to support a continued rally. However, if these margins are, indeed, reflected in prices, and profits are pinched by rising costs, as anticipated, equity bulls could be set for quite a jolt.

That jolt should arrive with the descent into a multi-year cycle low. As with the 2007-08 period, stocks could suffer a meltdown once commodities complete a parabolic move in conjunction with the dollar's 3-year cycle low next year. In this manner, central banks will experience the liquidity trap they set for themselves: any success in spurring nominal economic activity is destined to be self-defeating.

 


For ongoing interpretations of dollar, gold, oil, and equity cycles, please visit The DOCument's Member Area.

 


 

Deric O. Cadora

Author: Deric O. Cadora

Deric O. Cadora
theDOCument.com
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Deric Cadora

Deric O. Cadora is the editor of The DOCument, a daily newsletter offering equity and commodity market cycles analysis, macroeconomic discussion, and general market commentary. Deric is a professional trader and a General Partner of The Rutledge Group, a managing partner of a commodity-centric investment partnership. His investment and trading experience spans two decades, during which time he formed and served as principal of a broker-dealer, managed a long/short book on the proprietary trading desk of Citi Capital Markets, worked as an independent trader, and currently serves as Chief Portfolio Manager for a commodity-centric investment partnership.

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