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Shake Hands With This New Year Rally, Don’t Hug It


What's worse than the guy that wraps up a party just when the fun has finally gotten rolling? I hate to say it, but I am that guy right now and I've come to take the punchbowl away and bring it back to the storage closet, right in the middle of your New Year's bash.

I may be wrong, but I have yet to hear anything that gives me confidence that this rally is sustainable, let alone justified. Stocks are up because of something we didn't do. Since when is avoiding an accident a bragging point? Try calling up Allstate and asking for a discount due to all the accidents you didn't have. What I find even more unsettling is the likelihood that unintended consequences will emerge out of all of this. After all, drowsy Senators voted on the 154-page bill after 3-minutes of review.

And yet, we're off to roaring start, with investors fueling the best opening session of the year ever on Wednesday. For Sam Stovall, chief equity strategist at S&P Capital IQ, now is not the time to complain or take on excessive risk.

"You have to go with the momentum. You go with the seasonality. You go with the valuations. And I think right now, you have to sort of lean cyclically at this point," he says in the attached video.

As much as he can make the case for stocks going higher, his market analysis suggests investors may want to tread lightly, since history suggest there's an above average chance that stocks will be down by 12% at some point this year. Rather than loading up on risk, he says ''you might want to play the probabilities" and be ready - and liquid - to buy the dip when it comes.

For the record, that never happened last year, thanks to a blistering 3-month rally at the start 0f 2012. But that's the exception, Stovall says, not the norm, adding that the current lack of volatility "could turn on its tail" at any time.

Ultimately, regardless of what Washington does or doesn't do, he says it boils down to the quintessential balance between risk and fear.

"Don't be greedy. Don't go much beyond your neutral equity exposure or too far out on the risk curve," he says, adding that fear is the one emotion that drives investors. "Fear of losing money on the way down and fear of missing out on the way back."

Stovall sees the S&P 500 at 1,550 12-months from now, but warns that 8.5% move will not come in a straight line.