5/21/2013 7:09:42 AM

Good morning traders,

In 2012, when the stock market followed our forecast through July almost perfectly, I was pretty surprised - it's not often that happens. Well, as our 5th month passes, we're seeing the same thing with our forecast for 2013!

We're approaching a period where we could see a pullback - of the ABC variety - and some of you have been asking me for a projection to the downside. I don't project until I see the first wave lower, for that will tell me the potential for downside. If we're in a bull market, the price action will be shallow and the sentiment will be high. This 'efficiency of movement' is something that's measured as we see it.

I actually have these forecasts done out to 2023! I don't share that data because it will create too many questions. Stick with us though, and you'll be the only ones to know (except for the few hedge funds I advise).

How about liquidity?

Remember, this is only one view of liquidity and it isn't the complete view of liquidity. I actually haven't found a good indicator to measure overall liquidity - because there are periods where this relationship also breaks down. That suggests to me that there's another form of money coming into the markets - i.e. those in cash that start putting that money to work. I know, I see it all the time, as now that I manage money, I know there are people sitting in cash waiting to put it to use. There are some good books out there that talk about the psychology of being in cash when the stock market is rallying. This is the psychology of bubbles. I'm not saying we're in a bubble, but you never know until they pop! And they can always pop from much higher levels.

Another thing I look at as prices go high is the state of the internals and is there any relationship that's breaking down. While I don't have a chart of it today, we are seeing a pick up in the NYSE NEW LOWS even as the NEW HIGHS are peaking. This means there is some money flowing out of some stocks to fuel the advancing stocks even more! This is normally a sign of a weakening market - and if it gets really lopsided, it can also be a sign of a potential crash. But we're not there yet, so stay tuned... It's just something we'll be watching in the days ahead.

Regards,