To be sure, it has been an interesting year in the stock market. At the beginning of the year, almost no one saw gains of 20 to 30 percent for the stock market indices and most macro players continued to believe that the next crisis was right around the corner.

And yet with just a handful trading days left in the year, the S&P 500, DJIA, Russell 2000, and Midcap indices all sit near all-time highs while the NASDAQ composite remains near the highest level seen since the tech bubble burst in the spring of 2000. Worse yet for those who saw the glass as being at least half empty twelve months ago is the fact that 2013 did not provide many decent entry points.

Uh, It's a Bull Market

The fast-money types almost universally believe that the stock market is mean-reverting animal. Trends don't last and prices will always pull back to some special level that only they can see. "Buying strength is for chumps - the smart money waits for a pullback to take a position" seems to be the battle cry among this crowd. How many times have you seen the geniuses on T.V. say, "We can't buy that here; wait for prices to come in."

Except, wait, oh, that's right, calendar year 2013 offered exactly two "dips" worthy of purchase - and both came at times when there was a decent amount of uncertainty about the sustainability of the market's gains. In other words, it's been tough to get in. And because of this fact, a great many managers - especially the two-and-twenty crowd - have dramatically underperformed again this year.

Perhaps the key thing that many of Wall Street's masters of the universe got wrong this year is the fact that it's a bull market.

S&P 500 Weekly

Despite the fact that there were two devastating bear markets (where the S&P plunged more than 50 percent both times) in the nine year period between 2000 and 2008, the simple fact is this is how a bull market tends to act. Yet, unless an investor has been at this game for more than fifteen years, they may not be familiar with the concept.

Advice Providers Experiencing "Gain Regret"

Then there are the financial advisors leaning heavily on their Nobel Prize winning diversification strategies from Morningstar. It's a great business plan - especially in a bull market. You pay Morningstar a fee each month and then invest client assets in portfolios based on all that academic gobbliegook.

But one question: How's that static diversification doing? How's that exposure to the bond market, gold, and the emerging markets working out this year? The answer is that clients seem to be complaining about the money they didn't make this year. It's a little something known in the business as "gain regret."

But... Look Before You Leap Here!

So here's the dilemma. A great many investors have missed out on some very good gains this year. And given that 2014 is right around the corner, it's time to make plans regarding next year's strategy.

Given that the tenets of behavioral finance are clearly in play here, it is a safe bet that many investors are going to want to up their exposure to the stock market in 2014.

Unfortunately, this is called "performance chasing" or investing in the "hot dot." In short, using such an approach is fraught with danger as investors wind up "buying high" and then "selling low" (giving up on a strategy or position if it doesn't do what they expect). And anybody with a functioning calculator can attest,  such a strategy doesn't tend to work out very well.

Questions Worth Asking

So, before investors decide to make up for their mistake of being underinvested in the U.S. stock market in 2013 and bomb in for 2014, they may want to review the status of the bull market.

Some questions worth asking at this stage include:

• How far do bull markets tend to go?
  
• Are stocks overbought?
  
• Is the market overvalued?
  
• What's the risk?
  
• When might the next bear show up?

Later this week, we will take a look at some of these questions and attempt to formulate a plan for investors that may be looking to increase their exposure to the stock market.

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Taper (aka Fed Policy)
      2. The State of the Budget Deal
      3. The Outlook for Economic Growth

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend:  Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Near-Term Support Zone(s) for S&P 500: 1780
  
• Near-Term Resistance Zone(s): 1813

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator: Positive  
  
• Price Thrust Indicator: Moderately Positive
  
• Volume Thrust Indicator: Neutral  
  
• Breadth Thrust Indicator: Moderately Positive
  
• Bull/Bear Volume Relationship: Moderately Positive
  
• Technical Health of 100 Industry Groups: Neutral

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

• Overbought/Oversold Condition: The S&P 500 is  moderately overbought  from a short-term perspective and remains overbought   from an intermediate-term point of view. 
  
• Market Sentiment: Our primary sentiment model remains Negative . 

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: Positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Turning To This Morning...

The big news of the day is the budget deal reached in Washington between House Budget Committee Chairman Paul Ryan and Senate Budget Committee Chair Patty Murray. Assuming the bipartisan deal can be approved by both houses of Congress, the deal would avert a repeat of the government shutdown seen in the fall and cut spending over the next two years. U.S. stock futures initially reacted positively to the news. However, the enthusiasm seems to have been curbed since then.

Pre-Game Indicators

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

Major Foreign Markets: 
- Japan:      -0.62% 
- Hong Kong:  -1.71% 
- Shanghai:   -1.50% 
- London:     +0.36%
- Germany:    +0.23%
- France:     +0.71%
- Italy:      -0.12%
- Spain:      +0.42%

 Crude Oil Futures: -$0.06 to $98.45

Gold: -$5.40 to $1255.70

Dollar:  higher against the yen and pound, lower vs. euro.

10-Year Bond Yield: Currently trading at 2.823%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +1.88
- Dow Jones Industrial Average: +19
- NASDAQ Composite: -0.90

Thought For The Day...

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

Positions in stocks mentioned: none

Forget the fast money and the latest, greatest option trade. What investors 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 Can Help

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)