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5 Potential Market-Moving Events to Watch Ahead of 2014


Rather than focus on the fundamental and technical pictures, let's consider the convergence of important events that are lined up at the end 2013 and into the new year.

With the fourth quarter in full swing and with prices on the rise once more, it's time to extend our view a bit to the coming New Year. Clearly 2013 is a slam dunk with double-digit gains even in the weakest indices and seemingly more to come before the end of the year.

Although earnings haven't offered much oomph to the market this time around, it hasn't mattered as all news is good news again. The central bankers have been forced to continue pumping money, the politicians have kicked the proverbial can a bit farther down the road, and nothing (seemingly) can go wrong. But if we look to the horizon, there are a lot of issues all stacked together that make the start of the New Year potentially more problematic.

To start with, clearly US stocks are stretched to the upside. From a valuations perspective -- and using Schiller's Cyclically Adjusted Price Earnings Ratio (CAPE) -- the earnings supporting this market are clearly not cheap. Like anything, they can stretch farther, but we are definitely closer to the top of the earnings cycle than the bottom.

If we look at the market technically, it's no different there, either. The bullish setups just keep coming, but to think that they will continue to play out in perpetuity really isn't realistic. There will come a time when the market corrects for multiple weeks, not a few days. It is likely to correct with price as well. With everything at highs, and in many cases, all-time highs, and with no bearish setups in play, showing a chart at this juncture really doesn't offer much value. It is what it is, and that's a bullish picture for now. Until there is a bearish technical setup or two that actually play out to the downside, it's hard to talk of bearishness technically.

So rather than focus on the fundamental and the technical pictures, what if we instead simply consider the convergence of potential market-moving events that are lined up at the end of this year and into the beginning of next.

1. Congress having to put another budget together. The Republican Senate leaders have promised no more shutdowns, but it is apparent that whatever deal gets done will be contentious and full of drama. With the clock already starting to tick down, and with little movement to date, don't expect any simple solutions this time around either. What is to be expected is a lot of clamor and drama right before the Christmas holiday season.

2. Raising the debt ceiling. Although agreeing to a budget is probably harder, expect more dramatics here as the date approaches in mid-January. This is a very divided Congress and the distrust and disgust are great.

3. Janet Yellen taking over for Ben Bernanke at the Federal Reserve. Although the consensus is that Yellen is just as dovish as Bernanke, or possibly more, the consensus that is more important is within the Federal Reserve itself. The question is whether Yellen will be able to wield the same power that Bernanke has. Realize we are five years into the cycle, with interest rates near zero still on the short end of the curve but starting to work higher on the longer end. Quantitative easing first began in late 2008, and though still in place and running strong, the need to "taper" at some point becomes greater the longer that beginning point is delayed. The markets have a way of testing any transition in power, and you can expect they will test this one given its importance.

4. Following up on a big year. When the market produces outsized gains as it has this year, it is very difficult to follow up those gains with another outsized year. This should be especially true when the economic picture is so-so at best, which has been and continues to be the case. One has to expect that as the New Year gets underway, the pressure to take profits will be great.

5. The rest of the world. Although China has engineered yet another "soft-landing," it is still dealing with its property asset bubble, which will continue to force it to repeatedly tap on the breaks. There is always the potential for an overreaction, but so far it continues to goose things enough to keep growth on track. Europe is the more interesting case as the EU central bank has been able to talk a good show to accomplish a great part of its recovery and to keep rates low in the troubled spots. With the dollar under a lot of pressure and the euro going the opposite direction, that places a great deal of pressure on exports, and it seems just a matter of time before another flare-up happens in the eurozone.

So although all the world's problems remain seemingly under control for the time being, once the New Year is ushered in, there are a number of speed bumps to be traversed. The most important one will be the transition at the Federal Reserve, and how Yellen eases into power -- how the markets interpret her first moves and words, and what sort of changes she begins to institute to make her mark and to set her tone. With the markets around the world fixated on "free money" continuance, anything that hints at a different scenario is likely to be sold with a vengeance.

Twitter: @tatoday
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