In 2012, the world was supposed to end, Europe was supposed to crumble, China was supposed to have a hard landing and the US economic recovery was supposed to stall. In today's 24-hour news cycle, the media does not let any good crisis go to waste. As it turns out, the world didn't end and life goes on. The market did a great job this year of taking doomsday headlines in stride. As technicians, we read the tape and measure the price action rather than focus on the fear mongering.
Some mistake me for a perma-bull, but in reality I am far from it. In 2007-2008 for example, the price action confirmed the financial crisis at hand and dictated a more bearish bias. I adjusted my trading strategies accordingly. To effectively maneuver the market, you have to arm yourself with strategies to take risk off during turmoil and put money to work when technical conditions improve. The bottom in 2008, for example provided an outstanding buying opportunity for those who adopted a prudent technical approach.
As the year winds down, it’s time to reflect on my predictions for 2012 and outline my predictions for 2013. Overall, 2012 could be considered a very successful and constructive year for the market. The S&P is up 10.7% for the year despite the recent sell-off, the Nasdaq is up 13.7% and the Dow is up 5.4%. The healthy gains in the indices have come in the face of significant economic uncertainty: the US recovery remains plodding, the European debt crisis rumbles on and China struggles to maintain its steep growth trajectory.
While I agree that there is a lot wrong with this world, I abhor the amount of negativity that has become so commonplace in the media. Fear mongers have done retail investors a major disservice by driving them away from equities with doomsday predictions and “bold predictions.” Meanwhile, equities outperformed pretty much every asset class this year, and the indices dramatically outperformed most hedge funds. The Economist reported that the HFRX, a widely used measure of hedge fund industry returns, is up by only 3% this year while the S&P is up nearly 12%. The “smart money” hasn’t been so smart.
As traders we are able to maneuver in and out of positions more quickly and easily based on changing conditions. I have always believed in using technical analysis along with common sense to create a simple, blue collar formula for success. When you use too many indicators, you become paralyzed by indecision due to contradiction. I prefer to use a handful of simple tactics in order to identify and follow trends on several time frames.
Now, let’s first take a look at some of my predictions from last year. On December 28, 2011 I went on CNBC with Brian Sullivan and he asked me for my favorite tech set-up and retail set-up for 2012. My tech pick was Google (NASDAQ:GOOG) as it set up for a break higher out of a multi-year base. It has been a roller coaster year for GOOG, but it has shown resilience overall. My first target on GOOG was $750, and the stock went as high as $775.
My retail stock of the year was Wal-Mart (NYSE:WMT), which was set-up in a tight 12-year base. My target for the trade was a modest move to $72, but the stock dramatically exceeded those expectations, reaching as high as $77. I certainly did not execute those trades to perfection, but they prove that you can also generate alpha with a macro technical plan.
Our thesis has been that equities are far-from-dead, but as an active trader there are times to have "risk on" and times to have "risk off." If you read my note every day, I often talk about my aggression level using terms like “tactical approach"—which means I am being more of a selective short-term sniper—versus a “portfolio approach”—which means I am looking to swing multiple positions for multiple weeks. I adjust my approach based on the "condition" and "composure" of the markets. We pride ourselves on being able to navigate intermediate-term trends by using the same patterns that repeat themselves year after year.
Take a look at the action in 2012:
In the last 15 months alone, there have been seven inflection points where a trader could have adjusted his or her risk based on market composure.
CURRENT TRENDS TO WATCH
When you zoom out even further to a monthly chart, there is an interesting trend that is worth taking note of. I think that this decade+ long range in the S&P will get resolved to the upside.
The question to me is “when” the S&P will be able to break that level, and how to best maneuver the market along the way. I believe you need to have either an ultra long-term approach to the market, or commit to being an active trader that maneuvers trends on multiple shorter time frames based on the conditions. The “herd” tries to manage their portfolio within a middle ground, and that simply leads to panic and exuberance at the wrong times, in my opinion.
With a longer-term outlook, I believe once the double top at 1575 gets taken out the S&P 500 can reach the neighborhood of 1700 by 2015. I vehemently disagree with the self-important attention-seekers that come on the media and call for the bear case of 1000.
If you are also going to manage your money using an active approach, it’s important to understand how to maneuver your capital no matter where the market heads over the next few years. That is my primary domain. While I am optimistic about equities and believe the market is built to go higher, I let the price action do the talking when it comes to my trading.
Heading into 2013, on an intermediate-term basis the market has been in a new fledgling rally since Thanksgiving, although we are coming under some pressure within the last two weeks as the fiscal cliff gets closer. Taking caution, I believe, is the best approach until we get resolution to the fiscal cliff.
The question in my mind is whether we get a pullback and “shake out” before heading higher in the first half of 2013. We may end up going over the “cliff” and then the government will need to address the debt ceiling again in January and February. Many believe that if we get a fiscal cliff deal done it will be smooth sailing for the market immediately, but I don’t think they ever make it that simple for investors.
FISCAL CLIFF AND DEBT CEILING
As far as the fiscal cliff goes, I feel it is inevitable now that we are going over it. Politico is reporting that House Speaker John Boehner believes the “real deadline” is February or March, when the debt ceiling issues will rear its ugly head again. Republicans are keeping the debt ceiling as a bargaining chip in the budget negotiations. Going over the cliff for a short period of time would not necessarily be a disaster economically, but it may startle the market. Going over the cliff also would buy Washington more time to tackle the debt ceiling once again.
In fact, I think the market may prefer a comprehensive “grand bargain” be reached in January rather than have an imperfect band-aid deal be pushed through by Monday. If we go over the cliff before climbing back on it, it will get rid of the perception that Republicans are “raising taxes,” which is a characterization they want to avoid. The House will also vote whether to re-elect Boehner as Speaker on January 3rd. Boehner saw his authority undermined when his “Plan B” bill couldn’t muster enough support from ostensibly rank-and-file Republicans in the House, but his re-election could embolden him to get a deal done.
The most concerning aspect of this whole fiasco is the poisonous climate in Washington. Our electorate is more polarized than ever, and it is getting in the way of meaningful progress that this country desperately needs right now. From a trading perspective, it appears we could be set for this same type of headline-driven, choppy action through the first 1-3 months of 2013.
TECHNICAL OUTLOOK FOR 2013
From a technical perspective, a break and close above 1450 opens the door for a move back to the September highs of 1474. A break and close above those highs opens the door for a move back to 1540-1576 in the first half of 2013.
We also have to prepare for the other side of the coin, especially after Friday's weak close. We have been outlining 1395 as key support that will need to hold to keep bullish composure intact for the beginning of 2013, and we closed below that level on Friday. IBD has put the market in "Uptrend Under Pressure," which is further confirmation of the somewhat bearish conditions. The November lows of 1343 could come into play if Washington takes us over the cliff and shows the world once again how dysfunctional our political system is. In a period of history devoid of consensus, I think most of us can at least agree on the fact that Washington needs fixing.
I think if we do plunge based on those political factors, it could create a very exciting buying opportunity akin to what we saw after the debt ceiling debacle the first time around. In 2012, we got tremendous buying opportunities on the October 4th reversal low and the June 4th reversal low, and I believe we can get that type of buying opportunity if we get more weakness in early 2013.
There are several clues I will be looking for in January to help navigate the market. Will we get continued strength in the banks? Bank of America (BAC) has emerged from the ashes and is leading the sector with an explosive move in December. I think Bank of America (NYSE:BAC) can get to $16-18 this year.
One factor that could limit the banks’ upside in 2013 is the growing consensus that they will not be able to turn back many components of the Dodd-Frank regulation. The latest version of the Volcker Rule is expected to be more restrictive of bank trading activities and might now allow broad hedging of bank portfolios. Perhaps the new environment in the financial sector will be a positive, though, and investors will be more comfortable buying bank stocks knowing they are not taking on massive risk.
Apple (NASDAQ:AAPL) is also a very interesting case. The market has been able to hold up reasonably well despite AAPL’s persistent weakness over the past few months, which can be viewed as a positive. Banks deserve the most credit for picking up the slack. However, I will feel much more confident about the market if AAPL can return to its old self. If the stock breaks and closes below $501-505, the next support area isn’t until down in the $420-440 area, and it remains to be seen how the market would handle that type of plunge.
Gold bugs were disappointed this year despite continued dovish policy from the Federal Reserve and world central banks. With gridlock in Washington, Ben Bernanke and company have taken it upon themselves to try to stoke the sluggish economic with monetary policy measures. The results have been minimal, and the measure taken somewhat questionable, but we have not seen the wave of inflation that some have expected. The Fed initiated “QE4” in December—more than doubling the size of its monthly asset purchases—but Gold (NYSE:GLD) has sold off in response.
On a macro chart, 2012 appears to be just a consolidation year for Gold. Many analysts fear the possibility of a currency war in 2013 in which central banks debase their own currencies in an effort to export their way out of recession. This type of inflationary activity would have Gold bugs salivating, and likely lead to a dramatic price increase for the commodity.
After rallying up to around the $1800 level in the second half of 2012, Gold lost a bit of momentum and is trading back within the middle of its range. However, if the commodity continues to hold above $1600, it will increase the likelihood, in my opinion, that it trades back up to the $1800 level. If Gold can get momentum through $1800 I believe it can sere $2000+ this year.
I think we could see several foreign and emerging markets outperform in 2013. Japan’s Nikkei 225 was up 23% in 2012, and I think it could have a similar performance in 2013. Poland (NYSE:PLND), which is a bit off the beaten path, trades at a discount to many of its peers and I think has some room to the upside.
China’s economy has shown impressive resilience with economic data of late. Back in the summer I made a bullish call on the FXI, and when famed technician Tom DeMark’s made his call for the Chinese markets to have a strong year I agreed whole-heartedly.
From a stock picking perspective, I don’t like to make a ton of blind calls. I prefer to let the price action during the year do the talking, but there are a few stocks I like for 2013.
Yahoo! (NASDAQ:YHOO) is headed back in the right direction, I believe, thanks to new CEO Marissa Mayer. The former Google executive, who was the first female engineer at the company and a major part of its success, has the intelligence and experience to help YHOO redefine itself. The stock has had an impressive 34% run since early September, but if you zoom out the stock is just breaking out of a four-year lower-level base. I believe YHOO can get back to the $23-25 range next year.
Another stock I like on a technical basis is Boeing (NYSE:BA). If you zoom out all the way to a monthly chart, BA is just breaking out of a multi-year mid level base. I believe BA can get back to the mid to high $80 level. Stephanie Link, who co-manages the Action Alerts Plus portfolio over at TheStreet with Jim Cramer, likes Boeing as well, which adds to my conviction.
Facebook (NASDAQ:FB) has impressed me with its ability to shake off the large IPO lock-up expirations we have seen over the past couple months. It appears insiders are not overly keen to sell more shares, which is a positive sign. The company has not yet solidified its business model the way LNKD has, but I feel they will improve upon that. I think in 2013 you could see Facebook get back to the $32-35 range. Technically it needs to trade and close above $28-28.80 first.
Toyota (NYSE:TM), I believe, has strong prospects for 2013. The auto company finally got its $1.1 billion settlement out of the way last week, which appears to be a relief for investors. In my opinion the stock could get back to the $110-120 area in 2013.
Mosaic (NYSE:MOS) is my favorite stock in one of my favorite fundamental sectors: the ag's. The phosphate and potash producer could get back to the $75 area this year, in my opinion.
A stock I am cautious on for 2013 is IBM (NYSE:IBM). The tech bellwether has done a decent job reinventing itself from a hardware company to an ideas company, but I think it’s a bit overpriced at these levels. On the weekly chart you can see the steep uptrend that has been in place since late 2008 that is close to being broken. A break and close below $185 could lead to some technical damage on the macro chart of IBM. The stock hasn’t been able to gain much footing since breaking below its 200-day moving average.
Having a long-term roadmap for the markets is important, but I also firmly believe you need to have a plan for navigating the speed bumps to make it a smoother ride. If you equip yourself with a few technical strategies and common sense rules, you can potentially save yourself pain during pullbacks and take advantage of tremendous macro buying opportunities. I believe we will see both in 2013.
*DISCLOSURES: Scott Redler is long BAC, FB, AAPL, YHOO, SPY.