Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Stock Market Forecast for Remainder of 2012

Monday, December 3rd, 2012
By for Profit Confidential

I’d like to turn the keyboard today over to my colleague Anthony Jasansky, P. Eng. He’s been a 30-plus-year student of the Dow Jones Industrial Average, and I agree with what he says below in his analysis of the where the market is headed between now and the end of 2012.

As Anthony says below, as traders increase or lower their positions over the next four weeks; I see the uneducated popular media blaming the on/off “fiscal cliff” for the market’s gyrations. But the bottom line is clear: each year since 2009, the yearly increase in the Dow Jones Industrial Average has been getting weaker and weaker.

Here’s a chart showing the annual increase in the Dow Jones Industrial Average since 2009:

 QE1, QE2, QE3

Market Insider Bulletin, December 2012

2009: Dow Jones Industrial Average increases 18.8% over 2008

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2010: Dow Jones Industrial Average increases 11.0% over 2009

2011: Dow Jones Industrial Average increases 5.5% over 2010

The common denominator in the above chart? In each year since the Great Recession, the Dow Jones Industrial Average has logged a gain of only 50% to 60% of the previous year’s gain.

If today was the last trading day of the year, the Dow Jones Industrial Average would be up 6.6% for the year. In keeping with the three-year trend, the Dow Jones Industrial Average would have to fall about 400 points between now and year-end. I see this move on the downside as being more of a reality than an upside move.

Here are Anthony’s comments as promised:

“The quandary with the Fed’s monetary magic is that it no longer gives the Dow Jones Industrial Average the same boost that it did back in 2009 and 2010. The chart below shows that each of QE1, QE2 and QE3 was followed by progressively smaller stock market gains. To keep the economic recovery alive, the Fed has been capable of inventing newer, never-seen-before, monetary tools.

“Actually, for months now, investors have been more focused on the haggling between the White House and the Congress over solutions to the ‘fiscal cliff’ than on the Fed. The latest statements issued by the two sides are now media fodder and a convenient explanation for short-term market swings.

“High frequency traders probably thrive in this market, while public investors keep on reducing their equity investments.

“The technical group of indicators I follow has turned mildly negative. The recent Dow Theory sell signal, based on the divergence between the Dow Jones Industrial Average and the Dow Jones Transports, is the most bearish component. Insider trading is very bearish. The other bearish component is the fear index VIX, back on the edge of the danger zone below 15. In summary, beyond the erratic swings caused by the Washington bazaar, I expect no major market shifts for the rest of 2012.”

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in Profit Confidential, December 4, 2007. This devastation started happening the first quarter of 2008.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles