After enjoying the best year since 2013, investors are going to be looking for more good times in 2018. Virtually, all the experts agree that stocks will move higher in general. I think 2017 wasn’t just a great year for stocks but when measured against the backdrop of a lack of pullbacks and depressed volatility; it was one of the best years ever for investors.
Therein lies a major challenge for 2018.
How will investors handle increased volatility and even the notion of a 5% to 10% pullback at some point during the year? Making this even more intriguing is that such a pullback could happen in the aftermath of good news. We are not going back to those days of hoping for bad news; in fact, we escaped them a long time ago. The rally is on the cusp of being the oldest/longest running in history, and it brings certain anxiety.
I won’t even pose the rhetorical question of whether investors have become complacent because the answer is yes. The so-called fear-gauge CBOE Volatility Index (VIX) has swooned 51% in the past five years with 21% of the swoon happening in 2017. Investors are spoiled. I can only hope that by being students of the market and understanding the psychology of the market, folks will be ready to make money from increased volatility and not blink at the first sign(s) of trouble.
Other Indicators
Bond Yields
I’m watching bond yields closely as a gauge on investor sentiment and economic indicators, but I rarely make decisions on equities based on bonds. Yes, they can be the canary in a coal mine, but they can also be that squawking parrot that won’t shut up.
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Market Breadth
Decliners have been edging closer to advancers in the daily market action as new 52-week lows have also closed the gap with 52-week winners. The year 2017 was the tale of just five stocks carrying the entire market until the last month of trading. The big test: Can investors rotate out of those winners into fresh names and sectors or will those funds migrate to the sidelines?
I think those funds will move into other sectors.
Economic Data
There is a lot of critical economic data this week, including the December jobs report. Across the board, economic data portray an economy on fire and that has to continue.
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