Before I get into my annual stock market prediction on where the market is headed for the year ahead, it’s important to first take a look back.

As my readers know, we turned bearish on stocks in March of 2009, saying that stocks have been in bear market rally since then. Why did we turn bullish on stocks back then?

I’m a big believer in contrarian investing. By the spring of 2009 most investors had thrown in the towel on stocks. In fact, the two words, “stock market” became dirty words. Almost like, “real estate.” Doom and gloom presided heavily over the market in the spring of 2009—probably the most negativity I had seen on stocks in my generation. Hence, as a hardcore contrarian, when everyone is selling, I want to be a buyer.

Since March of 2009, the stock market has rallied 79.5%. In 2009, the various financial newsletters we publish picked 35 stocks that doubled in price. In 2010, our editors and analysts picked 21 stocks that went up 100% or more. Bottom line: the past two years have been a dream for stock market investors.

But all good things eventually need to come to an end. Let’s get realistic; we will not see a 79.5% rally in stocks over the next two years. The easy money in the stock market, as they say, had been made. In 2011, some pockets will do very well, other will do poorly. But for at least the beginning of 2011, stocks still have price appreciation potential left. Very few people are outright bullish on the stock market right now and there are very few alternatives for investors (two bullish factors). But stocks are getting expensive in relation to their dividend yield and price/earnings multiples (bearish factors).

The biggest threat for 2011 will be rising interest rates. Now, this shouldn’t scare my readers away from stocks immediately. If we look back throughout history, stocks have risen contemporaneously with interest rates for periods of six to 12 months before they have changed direction and gone the opposite direction of interest rate trends.

So, looking at 2011, I’m bullish for the start of the year. I still like these stock groups: retail; gold; oil; technology; and leading-edge health companies. I’m staying away from the real estate stocks and the utility stocks. Right now I’m bearish on stocks for the second half of 2011, as I see rising interest rates catching up with the stock market by then.

Sometime in 2011, the bear market rally that started in March of 2009 will come to an end. I’ll try my best during the year to time our exit from stocks just right.

Michael’s Personal Notes:

I just want to comment quickly on a couple of developments in the financial markets:

According to Washington-based trade group Investment Company Institute, investors pulled $8.62 billion out of bond mutual funds last week—the biggest weekly withdrawal in two years. These investors must have been reading PROFIT CONFIDENTIAL, as my readers know I turned bearish on bonds this summer. I wouldn’t be surprised to see the trend of money being withdrawn from bond mutual funds continue for weeks ahead. I also wouldn’t be surprised to see some of that money moving into the stock market.

Crude oil for delivery in February has surpassed $90.00 U.S. a barrel—a two-year high. I’m firmly in the camp that believes oil prices are headed higher. One hundred dollars per barrel is easily in sight. Why?

U.S. supplies of oil are dropping, the economy is improving, China’s economy continues to boom and consumers are buying cars again. This will all lead to higher oil prices. Look at the airlines stocks. They are all moving up, a leading indicator that consumers are starting to travel again, which results in more demand for oil. Anyone smell higher interest rates ahead?

Where the Market Stands:

Almost daily we have the Dow Jones Industrial Average creeping and closing higher. With the Dow Jones up 10.8% for 2010, the Dow Jones ends the year on a high—a very bullish sign going into 2011.

The bear marker rally in stocks that started on March 9, 2009, continues intact. Immediate-term, stocks still have life left in them.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005 when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.

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Almost Everything

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