The Bulls Are Rolling, But...

By David Moenning

Daily State of the Markets 
Monday, January 28, 2013

Good morning. Here we go again. For the fourth time in the last four years, stocks are on a roll to the upside that has caught a whole bunch of people leaning the wrong way. In 2009, it was the belief that the "credit crisis" was going to bring down the global banking system. In 2010, it was the European debt crisis that caused the crowd to lean too far to the dark side. In 2011, it was Europe (again) and the worry over the U.S. economy. Last year at this time, it was the global macro view and another case of deja vu regarding Europe. And this year, it was the fear that fiscal cliff would send the U.S. into recession. But once again, the naysayers were wrong. And once again, stocks are moving higher - much to the chagrin of the glass-is-always-half-empty gang.

This is the same bunch that publicly scoffs at anyone who dares to suggest that the stock market could go higher from here. One of the interesting things about publishing my morning market missive on a handful of different financial sites is to see the reaction and commentary from readers. And to say that I've been scoffed at for saying that the read of my market models tells be to stick with the bulls right now is an understatement. I've been called naive, unrealistic, and even ignorant for my view. Oh, and one reader suggested that I "just keep drinking the bull Kool-Aid," which, given my model-driven approach to the game did give me a chuckle.

What's interesting though is that the bears haven't bothered to come up with any new arguments lately. They still point to Europe, the weak growth in the U.S., the budget battle in Washington, and the fact that stocks are overbought as reasons why stocks simply cannot move ANY higher from here. And one person even suggested that the housing market will continue to be a stumbling block for the market - talk about fighting the last war!

So here's the deal. First, to anyone who hasn't been at this game for 15 years or more, I'd like to point out that stocks CAN advance for more than a few months without succumbing to a serious decline. The market CAN move up in anticipation of better days ahead without an external crisis gumming up the works. I personally have seen it happen time and time again.

And to those who believe that an overbought condition is a reason to start shorting stocks, I'd like to suggest you go back and study history. You see, without an external shock or crisis, a market that gets overbought and stays overbought tends to move higher over time. As the saying goes, a body in motion tends to stay in motion.

But... I most certainly DO see that stocks are now set up for some sort of a pullback, a correction, a pause, or at the very least, a "sloppy period" (aka a "time correction" where stocks go sideways for a period of time allowing the overbought condition to be worked off). The key though is to understand that when the market gets on a roll like this, the bears probably aren't looking at anything more than a garden variety pullback of 3% or so unless there is some sort of a catalyst.

So, given that this game is all about being objective and about dealing with what IS happening in the market (as opposed to what you think "should" be happening) I thought we'd try to dig up some potential negative catalysts that could actually put the bears back in charge of the game for more than a week or two.

Causes For Concern Going Forward

Although I am a card-carrying member of the glass-is-half-full club when it comes to the overall market and the economic outlook and I do believe that the optimists will win out again in 2013, we have come up with a handful of issues that could trigger a problem for the bull camp this year.

Let's start with the domestic issues. First, there is the budget battle. Lest we forget, the "sequester cuts" are scheduled to go into effect on March 1 and the debt ceiling is scheduled to be reached again by the middle of May