Saturday, January 01, 2011

2011 Market Thoughts

My turn to look into the 2011 stock market crystal ball and make my best guess on what comes next. We are heading into 2011 with two consecutive years of impressive stock market gains. We read that market sentiment is at extreme levels, and that with unemployment remaining high and no signs of recovery in real estate, it will be difficult to make advances in 2011.

While the survey of investment newsletter writers shows extreme optimism, remember the flow of money from equity mutual funds into bonds in 2010? Yes! There are a lot of folks sitting in bonds. Have you seen the last month's bond chart? I have. And at some point, all those folks who plowed money into bonds with interest rates near historic lows will see those charts and those declining principal values, then decide to go back to what has been working lately: stocks! I believe that we could see the return of greed to Wall Street in 2011.

You know I like to use history as a clue to what may happen in the future, right? The third year of presidential terms tend to be a good year for the market. I think the pattern holds true in 2011.

There are also a lot of folks in gold. I believe gold is in a bubble, and once folks see their gold ETFs start sliding, they will cash out and go into stocks, too.

There is always volatility. There will be pullbacks and frustrating trading ranges. I think one will have to watch out for whipsaws. Especially IBD's The Big Picture whipsaws, if you know what I mean. I expect the pullbacks will be bought.

In the back of my mind, I believe we are still in the bear market that began in 2000 and are experiencing bull and bear cycles between the highs and lows. Since March of 2009, we have been in a bull cycle. This could be the year we get close or make new highs in the index and set up the next bear market. We're not there yet.

So, I think we will be closing in on the previous market highs by year end. That would represent a very nice year for the market. Lets make it official. For the SP500, I believe we will be in the upper 1400's by the end of 2011.

I remain 100% long headed into the New Year. I am still overweighted in high beta (NDX and small caps). I will try to be patient and remain with the trend rather than fight it or guess at its demise. It is what it is, until it isn't.

Good luck to all in 2011!

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