It’s that time of the year…investors want to know where the stock market is headed in 2012. And I don’t blame them for their anticipation. It’s been three great years for stocks; what will we see next year?
In classic bear market style, the rally in stocks we saw in 2009 caught most investors by surprise. In fact, most retail investors totally missed the rally in stocks that started in March of 2009. When the Dow Jones Industrial Average hit 6,440 on March 9, 2009, I would wager many investors totally gave up on stocks as opposed to seeing it as a buying opportunity like we did.
The returns for stocks in 2010 (about 10%) were not as great as 2009 (the “easy money” year for stocks). This year is turning out to be another winner for the Dow Jones Industrial Average, but not a big winner like 2009 or 2010. I’m surprised the bear market rally that started in March 2009 is still going, but when you have a government and a Fed fighting the bear tooth and nail, the bear market’s efforts to bring stocks back down are delayed. (Notice how I said “delayed” and not “put off.”)
The year 2012 is a presidential election year. The Dow Jones Industrial Average almost always rises during presidential election years. Over the past 60 years, there have been only two exceptions: the year 2000 and the year 2008—the Dow Jones Industrial Average went down those two presidential election years.
The pros for stocks are many: Corporate America is making money; they stand ready to cut payrolls if hard times come back; and they are flush with $2.0 trillion in cash. Investors are still wary of the stock market. If the overhang that the eurozone crisis has on the market can be lifted, the Dow Jones Industrial Average would rally sharply. Monetary policy remains very favorable, interest rates still very low.
The cons for the stock market are many as well: the high unemployment rate in the U.S. is a drag on an economy that is 70% dependent on consumer spending; there has been no real effort to curb government spending or the national debt; the U.S. housing market remains pathetic; and all the money printing of the past three years is hyper-inflationary, which means interest rates will need to go up. (The huge companies that trade on the Dow Jones Industrial Average are allergic to higher interest rates.) The debt crisis in Europe could easily make its way to America.
All things come to end. The bear market rally that started in 2009 will be no exception. But bear market rallies don’t just quietly subside; they usually go out with a bang. And that’s what I’ve been waiting for: a final, speculative, almost-euphoria-type blow-off on the upside for the Dow Jones Industrial Average. And a presidential election year could be a great time for it to happen.
When everyone is on the bandwagon, that’s the time to get off…
According to a report from the CFTC, short positions against the euro were at net $14.4 billion in the third week of November—a 17-month high. Seems everyone is betting against the eurozone and, with such a heavy consensus trade, I wouldn’t be surprised to see the trade—short euros against the U.S. dollar—backfire.
I’ve written this many times: the market usually does the opposite of what is expected of it. Whenever investors and speculators take a major position (like their current heavy bet on the immediate demise of the eurozone), the market usually delivers the opposite. In this specific case, if the eurozone shorts need to cover their positions, the euro could rise sharply against the dollar.
Please don’t get me wrong; I still have the belief that, in the long term, the eurozone is done. I believe it was a mistake in the first place. Either the weaker countries will need to exit the eurozone or Germany will exit the currency. Bailouts by the European Central Bank (ECB) or International Monetary Fund (IMF) are just short-term, “print more money” bandages for the eurozone. No structural changes are made by piling debt upon debt or by printing money—only inflation is created, which will turn out to be a more serious problem.
However, in the short term, the euro may have become too oversold and there may be too many immediate bets against the eurozone, all of which could lead to an unexpected spike in the value of the euro versus the U.S. dollar.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average opens this day up five percent for 2011. Add in a 2.5% average dividend yield for the year and stocks have returned about 7.5% in 2011. The current trend for the market is to open up sharply in the morning, with the momentum lost by the end of the day.
I’m getting a little worried about rising bullish stock advisor sentiment. While the alarm bells aren’t ringing yet, hope over a resolution to the eurozone debt crisis is turning stock advisors more and more bullish. I’m keeping an eye on this development. This stock market has gone up the “wall of worry” for 32 months now. Each time stock advisor sentiment has turned decisively bullish, the rally has retreated.
We continue to trade in a bear market rally in stocks that started on March 9, 2009.
What He Said:
“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing that more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.