2014 Stock Market Prediction…. Correction

Yes I said it. The only person I have heard dare recognize the bullish lemming consensus regarding 2014 is once again Doug Kass. Always the voice of reason it is Doug that prompted this ensuing rant. Did I mention that the S&P Volatility Index (VIX) closed at 13.04?

For the past month I have been warning my members that there would be a year end rally for two reasons. The first is politics. Ben Bernanke will on January 31st end his term in office and  there was going to be no way that the markets would sell off into the New Year. After all, Ben Bernanke has carried the water for an incompetent President and Congress for the past five years. They owe him his legacy. Add to the my legacy argument that seasonality vastly favors longs this time of year.

Compensation Dictates Behavior

There are many in the media who take issue with me bashing hedge fund mangers for manipulating the markets in their favor during seasonally light volume periods. Take right now for instance. Hedge funds have under performed the S&P 500 by a wide margin during 2013.  Hedge funds will argue by their very nature they are supposed to provide a hedge in down markets and their under performance is not unusual. Did I mention that they make get paid a 2% management fee along with 20% of profits? They know the truth and the truth is they need to send out their year end statements and it was a must that they squeeze the shorts on the Russell 2000 and now they are pumping up the Semi Conductor sector as well. What happens when the January 1 hits and the new year has begun? With their slate wiped clean and a fresh new year at hand I would be looking for opportunity. Where is that opportunity? Short this market!

Russell 2000 Money Flow Divergence

When I take a look at the weekly chart of the Russell 2000 I cannot help but cringe. For instance take one look at the Money Flow Index which I have annotated in blue. Note how it is in a downtrend yet the Russell 2000 continues it’s melt up on declining volume. Is this a sign of institutional accumulation? Hell no! This is a sign of an orchestrated short squeeze during a seasonally light volume period. Then begs the question… Who is going to come in January and continue to put a bid under this market? Did I mention that we are at record highs in margin debt?  Why should margin debt matter? Because when the selling begins the calls will go out and when forced selling which inevitably come does in fact become reality the old saying comes into play “Today’s Highs May Be Tomorrows Lows”

Russell 200 Weekly Chart