For anyone still dazed and/or confused as to why the S&P 500 was up nearly 30 percent in 2013, the slogan from Bill Clinton's 1992 presidential campaign sums it up nicely. Although the first iteration of the now familiar phrase appeared to be spoken off the cuff at the time, "It's the economy, stupid," became James Carville's most famous words.

In this case though, it wasn't about the "state" of the economy, which was deemed to be quite dour at the beginning of the year in 2013. No, it is important to understand that it was the "outlook" for the economy that really drove stock prices in 2013.

Despite investors' early concerns over the fiscal cliff, the sequestration cuts, the slowdown in places like China, and then later in the year the government shutdown and the Fed's taper, the rally in the stock market was truly remarkable in many ways. For example, one of the keys to 2013 was the fact that the S&P 500's daily volatility was the lowest since 2006. As such, investors only had to deal with one correction of at least 5 percent - the least since 1995.

In terms of returns, the 29.6 percent gain for the S&P 500 index was not only the best since 1997, but also the 11th-best year since 1926. Impressive.

Enough Already, It's Time To Move On!

Okay, enough about 2013, right? It's time to move on and deal with what is turning out to be the worst start to a calendar year in a decade. Yep, that's right; despite the brutal stock market decline of 2008, this is the worst start to a year so far since 2005.

And since this is not at all what the pundits had been predicting, we figured it was good time to review what the historical cycles look like for the first month of the new year.

Reviewing The Cycle Projections

As we've mentioned a time or twelve over the past year, cycle analysis should not be used in a vacuum or as a stand-alone indicator. In fact, there isn't any single indicator should be used in a vacuum - that's  just basic, common sense. However, the cycle projections we follow remain an important part of both our daily and weekly Market Environment models and as such, we want to keep everyone up to speed on this work.

For anyone new to this analysis, the cycle composite is a combination of the one-year seasonal, the four-year Presidential, and the 10-year decennial cycles - all going back to 1928.

Is The Market In Sync With The Cycle Projections?

The first step in the analysis of our cycle projections is to get a feel for whether or not the cycle projections are "on" or not at the present time. Looking at how the market acted relative to the cycle composite in December, it is interesting to note that the cycle composite pretty much "nailed it."

To be sure, there was a fair amount of hand-wringing over the taper and the Fed was really the focus during  the vast majority of the month. However, Ben Bernanke's surprise statement that the FOMC was basically lowering the unemployment threshold and shifting its focus to inflation caused the market to act almost exactly as the cycles had projected.

Some might call December's performance relative to the cycle projection pure luck. But, as is often said in this business, especially when using technical or chart analysis, it is what it is.

We also like to look at where the market is relative to where the cycle composite suggests it should be from a longer-term perspective. In this case, we like to overlay the performance of the S&P to the cycle using a four-year time frame.

 

In doing so, it is interesting to note the market is currently almost exactly where the cycle projection said it would be. Sure, the path over the last four years has varied a bit. Sometimes greatly so. But at the end of the day - and over a four year period - the cycle composite's projection has been eerily accurate!

January Tends To Be Strong Historically

Most investors are aware of the fact that the month of January tends to start strong and end strong. However, in looking at the pattern of all January's since 1900, it is clear that while the New Year tends to start off with a bang, there is usually a pullback in the middle of the month. However, history shows that all's well that ends well, as the early rally tends to resume before the calendar pages change.

What Does the January Cycle Look Like This Year?

The next step is to take a look at what the cycle composite's projection is calling for during the coming month. So here goes...

The Cycle Composite (the combination of the one-year, the four-year, and the ten-year cycles) suggests that January will be somewhat volatile, yet positive. Like the historical one-year seasonal pattern, the cycle composite says January should see an early rally, then a quick pullback in the middle of the month, followed by a decent rally into the end of the month.

But, spoiler alert: The beginning of February could be rough.

So, should investors begin to worry that instead of the traditional January joyride to the upside, they are instead seeing a bump-and-grind lower? Time will tell, of course. But, given the accuracy of the cycle composite lately, it is probably not a good idea to abandon ship just yet.

Remember, "it's the economy, stupid." And as long as the prospects for the economy continue to improve, the pullbacks in the stock market are likely to be short and sweet.

Looking for Guidance in the Markets? We can help...

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Turning To This Morning... With stocks having moved in the exact opposite direction as they usually do during the first three days of the year, many traders may have been left scratching their heads on Monday. However, this morning it looks like Janet Yellen's confirmation as the next Fed Chair and a rebound in Europe is creating a reason to go the other way. Thus, it will be interesting to see if the bulls can wrestle the ball away from the bears here.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets: 
- Japan:      -0.60% 
- Hong Kong:  +0.13% 
- Shanghai:   +0.06% 
- London:     +0.43%
- Germany:    +0.60%
- France:     +0.41%
- Italy:      +0.89%
- Spain:      +1.68%

  Crude Oil Futures: +$0.65 to $94.08

Gold: -$1.50 to $1233.70

Dollar:  lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.963%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +8.13
- Dow Jones Industrial Average: +84
- NASDAQ Composite: +14.84

Thought For The Day...

Employ your time in improving yourself by other men's writings, so that you shall gain easily what others have labored hard for -- Socrates

Are you getting all the market research you need?

Remember, you can receive email alerts  for more than 20 free research report alerts from StateoftheMarkets.com including:  

• State's Chart of the Day - Eeach day we highlight a top rated stock with a positive technical setup
  
• The Risk Manager Report - Stay in tune with the market's risk/reward environment
  
• The “10.0” Report - These are the REAL best-of-breed companies
  
• The Insiders Report - See what the people who know their company's best are buying
  
•  ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.
  
•  The SOTM 100 Portfolio - The top rated stocks in each market sector
  
•  State's Market Models - Each week we quantify the "state of the market" with a series of models
  
•  The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Our Mission Statement:

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Follow on  Twitter: @StateDave

---

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.