BofA Merrill Lynch technical analyst Mary Ann Bartels is out with her 2013 outlook, and it contains a bit of a dire prediction for investors.
Bartels says that if certain underlying market trends don’t turn around soon, there could be a big correction in stocks that ushers in a bear market next year.
“We expect the US equity market to remain strong moving into year end 2012 and into early 2013, but the risk of a bear market in excess of 20% beginning in 2013,” she writes.
There are three things that have Bartels worried. The first is the advance-decline line, which she says hasn’t confirmed the recent rally in stocks.
(The advance-decline line measures the number of stocks that are rising, less the number of stocks that are falling.)
Below is a chart showing the S&P 500, which has rallied, while the A/D line has remained flat:
Bartels’ second concern is the presidential cycle. She writes that “after a presidential election, in the month of February the market is often down sharply, on average by 2.3%.”
The chart below suggests 2013 will mark the “weakest period of the presidential cycle,” based on historical trends:
Finally, Bartels says the big run in stocks that started in the spring of 2009 may be approaching the end of its shelf life.
March 2013 will mark four years of expansion in the market. However, Bartels writes, “The average time a bull market for the S&P 500 in excess of 20% lasts [is] 2.5 years and the cyclical bull from March 2009 is the eighth longest out of the 25 bull markets that have occurred since late 1929.”
In other words, it may just be time for a change in direction.