Not since 1995 has the S&P 500 not had at least a 10% pullback.   Normally, you can count on a 10% pullback within an ongoing bull market to a great time to add funds or bring new accounts online.  But 2013 is the year of the relentless rally where 2% pullbacks are new 5% pullback.    Extreme bullish investor sentiment which is normally a good barometer of when to ease up on portfolio exposure has been pointless, as previous blog posts have demonstrated.

So, whats going on you ask?   Why is this year different from the others and what does it mean going forward?

Markets are clearly being driven higher by the Federal Reserve current policy of Quantitative Easement and its by product of 0% short term interest rates.

Its no coincidence that when the Fed ended QE1 and QE2 markets fell apart with declines of -16% and -19% respectively in 2010 and 2011.

Its fashionable right now to analyze each economic tick (especially the recent positive employment data) to determine when the Fed will end QE3.   But the truth is we really don’t have an accurate guess for when that will happen.

Three things we know for sure at the moment:

1.  We are in the midst of the strong season for equities and that will last until March 2014.

2.  The economy as measured by employment is improving.  Contrary to politically biased media outlets job growth is not coming from part time employment.   GDP growth in the 3rd quarter was stronger than expected.   This is market friendly.

3. Bob Dieli’s Aggregate Spread and are both at benign/miniscule odds of recession.  Market friendly again.

My best guess of what will happen?  Eventually the Fed must end QE3 and the markets may anticipate this ahead of time by churning nowhere or showing internal deterioration in strength.    My thinking is that the Fed will do nothing till at least after congressional budget talks in January but by the time March comes around and temps here begin to melt some snow we should be decreasing our equity exposure in a meaningful way.

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