S&P 500 Starts 2014 With Drop After Best Year Since 1997
Comment of the Day

January 02 2014

Commentary by David Fuller

S&P 500 Starts 2014 With Drop After Best Year Since 1997

Here are some sample paragraphs taken in sequence from this article and statistical tally by Bloomberg which may be of interest:

U.S. stocks declined, with the Standard & Poor’s 500 Index poised to start the year lower for the first time since 2008, after benchmark indexes posted the biggest annual rallies in more than 15 years

“More people seem to be wary, as we are, of potential corrections as markets get overexcited,” Oliver Wallin, who helps oversee $5.6 billion as investment director at Octopus Investments Ltd. in London, said by phone. “The question is just when to time it. A lot of people are willing to continue in this rally but are nervous at the same time. We’ve got one eye on the exit but we know there is money to be made in the short term.”

The S&P 500 surged 30 percent in 2013, finishing the year at an all-time high for the first time since 1999. The first trading session of January has proven profitable for investors over the previous five years, with the index gaining an average of almost 2 percent that day since 2009, according to data compiled by Bloomberg.

The Dow average climbed 27 percent in 2013 for its best performance since 1995, led by Boeing Co. and American Express Co. International Business Machines Corp. is the only member of the 30-stock gauge that declined last year.

Analysts are predicting 116 stocks in the index will see price declines this year, according to average year-end targets compiled by Bloomberg. That’s the greatest number of bearish forecasts for the S&P 500 (SPX) in nine years, the data show.

Reports from Europe today confirmed factory output in the euro area expanded last month at the fastest pace since May 2011 as Italy’s manufacturing beat estimates and Germany production grew for a sixth month. Data yesterday showed China’s official Purchasing Managers’ Index slipped to a four-month low in December, while a private report today also signaled manufacturing grew at a slower pace.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, rose 3 percent to 14.13 today for a fourth straight day of increases. The gauge finished 2013 with a 24 percent drop, the largest decline since 2009.

Newmont Mining increased 4.5 percent to $24.08. Gold for February delivery advanced 1.8 percent in New York after the metal posted its largest annual decline in three decades. Newmont fell 50 percent last year for the biggest decline in the S&P 500.

David Fuller's view

A number of US market commentators have been pointing out that after very bullish years such as 2013, which saw the S&P 500 Index gain 30% and the Nasdaq 100 Index even more, that the US stock market averaged single figure percentage gains the following year.  While that is certainly possible for 2014, given the very positive monetary tailwind, there are some tax considerations that can affect the short term.

I am referring to Capital Gains Taxes (CGT) for not only US residents but also investors and traders in other countries who hold similar positions and are also subject to CGT.  For instance, we can see from the chart of Total Known ETF Holdings of Gold that people continued to sell throughout all of 2013.  Initially, they would have been taking profits but it is also reasonable to assume that as the decline persisted, short positions were being opened in gold and obviously not just in ETFs, as bullion continued to decline.  Goldman Sachs, for one, made no secret of the fact that it was bearish of gold.

It is likely that some successful short sellers of gold during 2013 also had other profitable positions, perhaps in the obvious example of stock markets which were the major beneficiaries of low interest rates and the monetary stimuli of central banks in 2013.  If they had taken some significant profits last year, they may have also preferred to hold off on taking additional profits until 2014.  Now that the yearend holiday season is over, it would not be unreasonable to assume that any investors who had deferred taking large short position profits in precious metals or additional long position profits in stock markets during 2013, for CGT reasons, can now book some of those profits in 2014, should they wish to do so.  

This would help to explain the bounces that we see on daily charts for gold, silver and platinum today, plus the declines that we see in stock markets, including the Nasdaq 100 Index, plus downside keys from range highs for the Euro STOXX 50 Index and the Euro STOXX Banks Index.

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