As the curtain begins to drop on 2011, it's time to start looking forward to 2012. But first, let's take a look back at the year that was. It was certainly a doozy, one full of unprecedented and controversial intervention by world policy makers made. The fate of the world economy hangs in a delicate balance as we speak, and 2012 is certain to be a year of extremes.
Before we get into all of that, though, let's revisit by Predictions for 2011. At the beginning of that post I made this statement, "If the past few years are any indication, 2011 will develop its own distinct identity." It would be hard to argue that point. The world economic recovery never took hold like many people had hoped, and as a result Europe finds itself in what seems more and more like an un-fixable mess.
Mother nature's wrath in 2010 was thought to be an aberration, but extreme weather seems to be becoming more of a trend than an outlier. Vicious tornadoes, unseen in decades, ravaged communities from Joplin, MS to Tuscaloosa, AL. The most notable tragedy of course occurred in Japan, where the massive earthquake and Tsunami killed thousands and triggered a frightening nuclear crisis.
The trading year for 2011 was similar to 2010 only in the fact that things changed dramatically in their latter halves. In 2010 the market took after following the September Jackson Hole summit, when the Fed outlined a commitment to propping up asset prices. In 2011, the path diverged in an altogether different direction, as the price instability created by the Fed's actions came to roost.
TECHNICAL OVERVIEW OF 2011
There were two powerful technical patterns in 2011 that could have made your trading year, both of which we noted aggressively in posts on T3Live. The first was the macro head and shoulders pattern that was formed from February to August 2011. The market triggered below the neckline after the S&P ratings cut, and made the measured move to the downside (and then some). The move was faster and furious than anyone ever could have imagined.
The second major tradeable technical pattern of 2011 was the outside bullish reversal on October 4th. Whenever we get a major technical day that changes the composure of the market, I point it out to my community as a "day to take notice". On October 4th, bearish market sentiment had reached climactic levels (often a pre-cursor to a major market reversal) and shorts had piled in. When the European officials announced a massive liquidity program, it triggered a steep short squeeze and then rally that traders could have capitalized on based on the technical action. Twice during that rally, stocks made shallow, buyable Fibonacci retracements.
After the S&P ratings cut, the market plummeted to depths traders thought impossible in the modern era. The violence of that move has put everyone on edge since, and likely driven many investors out of the stock market altogether. From that point on, the market has been stuck in a range, but there have been violent swings in that range that have made life hard and painful for traders trying to corral it too aggressively.
PREDICTIONS FROM 2011
I have been on record since 2009 making "bold calls" on the price of gold, as the late Mark Haines labelled my call on Gold on CNBC. (I have developed a bit of a reputation in the media for bold calls, including the market bottom in 2009). This year, however, even my upside prediction wasn't audacious enough!I thought Gold would hit $1700-$1800, but it instead hit $1900 before weakening over the last month.
I predicted Apple (AAPL) will see $400, and it peaked as high as $425 before a surprising earnings miss, combined with the passing of Steve Jobs, gave the company a reality check. Apple now finds itself in an important time in its life-cycle. Without its visionary and meticulous leader, many believe the quality of its products and its cult following will wane. I believe the company is stronger than one man, but next earnings report will be very telling. Was the last weak quarter, mostly due to slow iPhone sales, due to people waiting for the iPhone 5 (which turned out to be a 4S), or is it the start of a new normal for Apple? I don't think AAPL has topped out.
My upside target on the S&P was 1325-1375, and we reached that point before pulling back. I think we will continue to see extreme volatility swings in 2012, and wouldn't rule out the possibility of the 2011 and high AND low being taken out. I think the European crisis can crash to even more extreme depths before a more definitive way forward is found.
Politics in Washington picked off in 2012 where they left off in 2011. Gridlock over the debt ceiling triggered the S&P default that sent the market tumbling. The idea that any US politicians wanted to see a US default was enough to scare the ratings agencies. The bickering and polarization of politics in Washington is at an all-time high, and politicians on both sides of the aisle are putting politics ahead of the interests of the American people.
MAKING CONTINGENCIES FOR 2012
I almost hate to write a post titled "Predictions for 2012" because it is misleading coming from me. While I speculate on macro events, I do not base my trading on them. Trading is my source of income, and I would never base my livelihood on "predictions".
As a trader, I take an active approach to manage risk and position myself for maximum profit. Instead of making and trading on predictions, I make contingency plans, or if/then statements.
Making a prediction on market direction for 2012, I think, will be particularly difficult. There are so many unanswered questions, and frankly so much deception and heresy, that is hard to know what lies ahead in Europe. The headline driven market will continue, which is hard because the headlines seem to be manipulated every single day. The market is hit with a barrage of rumors each day, and its hard to ever know which are credible.
As a trader or investor for 2012, I think the bottom line is this: you either need to have an ultra long-term time horizon for your investments, or you need to take a short term trading approach. I think anything in between, in this environment, is too hard to stomach. The wild swing in the market make it difficult to hold onto swing trading positions, and your timing has to be absolutely perfect to be able to stay with trades.
KEY TECHNICAL AREAS FOR 2012
As a part of my contingency plans, I outline key technical levels that I will be watching for market composure.
We head into 2012 with positive momentum, and accounting for new money in-flows in the New Year, I think the first step is outlining short-term resistance points. A move through the 1260-1262 area would open the door for a move to 1320-1340. At that point we would need to take a look at the landscape in Europe. In March, nations in the Euro zone will either ratify the new treaty or not, and that vote will have a major impact on the next move.
After we potentially probe some upside, we need to also be prepared to watch levels on the support side on the S&P. The first level to watch is 1196, and then 1160. Midterm support 1100-1070. If European bond yields continue to rise and hold above unsustainable levels, I believe we can easily see 1010-1040. I think if the ECB doesn't step in with massive asset purchases to lower borrowing costs, which, mostly due to Germany, it has been reluctant to do, we can see a move down to major, major support at 920-940.
If we continue to see steps in the right direction in Europe, and Washington starts to compromise a bit, we can get some significant upside in 2012. Above that the next big target would be 1410-1440. I will monitor composure at each step of the way, and I think the trade can change several times before we ever truly pick a longer-term market direction.
While the US markets continue to be held prisoner by Europe, the GIGANTIC elephant in the room is China. A potential hard landing could exacerbate the current pressures on the world economy. The country has insulated itself to a certain extent because it has kept its currency artificially low, a controversial topic that has drawn the ire of President Obama and other world policy makers.
My wife will continue to put money into her 401k monthly and into my sons 529 college for savings, but I wouldn’t tell my baby boomer parents to put money into the market if they need it. Five years from now I think things will be better than the last five years, but next two years are hard to predict. Timing the market, like this year, will be the key to success, and that is no easy task.
SECTORS TO WATCH
2012 is not a year for big predictions or macro calls, it is a year for caution. With that being said, there are two sectors that I will be watching closely based on their fundamental outlook.
First is the oil service sector. Working closely with personalities from theStreet, we often discuss the oil service stocks and we are all bullish on the group. The sector has been beaten down a bit, but I believe it is putting in a sloppy bottoming pattern. My long call on OIH was featured on Jim Cramer's Mad Money earlier this month, and although my trading stop was initially hit, I believe the group can eventually make that strong move.
My favorite two oil service names are Apache(APA) and Exxon-Mobil (XOM).
The second sector I will be watching is the agricultural group. This sector took the year off in 2011, but the outlook remains extremely bullish. World population growth and the rise of affluence in developing countries are set to cause a spike in worldwide demand for not only food, but foods that are higher up on the food chain. It takes much more corn to feed a cow to eat that cow, than it does to eat the corn.
The amount of arable land globally is also decreasing due to climate change, and fertilizer producers stand to gain most by enabling farmers to grow crops on otherwise untenable land.
My three favorite stocks in this sector are CF Industries (CF), PotashCorp (POT) and Mosaic (MOS).
While we have seen some tech stocks with high multiples unravel in 2011--Netflix (NFLX) being the most notable, and Amazon.com (AMZN) well on its way--I think you just have to have a discerning eye with the group.
My favorite tech stocks for 2012 is Google (GOOG). GOOG has been in a three-year channel, and I think it has been building a nice base for a further surge in price. The stock could see $750-$850 if the market doesn’t see a massive correction. They now have Search, Video, Mobile and the Cloud. They trade at a PE of 14, and it has a great technical pattern. Above $630 it can open up for a big move.
(Last year my Stock of the Year, which I presented on CNBC, was Home Depot
While Chinese stocks made the headlines for all the wrong reasons in 2011, I think the bear market we have seen in the Chinese market over the past two years presents a great buying opportunity long-term. Only trust the biggest and most-covered stocks in this market.
I do think 2012 will be a very tough year for some state finances, and I wouldn't rule out the possibility of some major, strategic defaults.
I think Joe Biden doesn’t run with President Obama for Vice President. I think he needs to solidify that post for what will be a tough re-election campaign, and I wouldn't rule out Hillary Clinton.
Gold will hit $1400-1440 before hit hits $1700-1740. The US Fed and the ECB have changed their tone regarding asset purchases and inflation pressures are waning. If deflation becomes a real concern, gold will plummet.
I think that Research in Motion (RIMM) gets taken over at $17-22 after its dramatic fall from grace.
The housing market in China is a ticking time bomb, and I think it gets hit hard.
Sadly, I think a war between Israel and Iran is inevitable. Tensions have recently started to bubble over. It could be a devastating war, and oil prices would spike sharply in such an event.
I think Amazon (AMZN) is the next former tech favorite to really unwind. I think it goes below $150. Profits are just not increasing at a rate that justifies its valuation.
I think if the stock price continues to decline, Goldman Sachs (GS) will at some point take itself private.
Finally, last but not least, I think we start a massive bull run sometime in the next 12-18 months. Europe needs to either do what it takes to sort the current mess out in a bold and decisive way, or break up the Euro zone and Euro currency. The latter scenario would cause a great deal of short-term pain, but it would rid the world of price instabilities that have caused these massive market fluctuations. A recession could be imminent, but the market, I believe, would get ahead of the economy and focus on the fact that the world is finally not kicking the can down the road .
*DISCLOSURES: Scott Redler has no positions