As the curtain begins to drop on 2011, it's time to start looking forward to 2012. But first, let's look back at the year that was. It was certainly a doozy, full of unprecedented and controversial intervention by world policy makers. The fate of the world economy hangs in a delicate balance as we speak, and 2012 is certain to be a year of extremes.
A year ago, I wrote, "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 unfixable 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 ravaged communities from Joplin, Mo., to Tuscaloosa, Ala. Of course, the most notable tragedy occurred in Japan, where the massive earthquake and tsunami killed thousands and triggered a frightening nuclear crisis.
Two powerful technical patterns in 2011 could have made your trading year. The first was the macro head-and-shoulders pattern that was formed from February to August 2011. After the S&P ratings cut, the market triggered below the neckline and made a measured move to the downside (and then some). The move was faster and more furious than anyone expected.
The second major tradable technical pattern of 2011 was the outside bullish reversal on Oct. 4. Bearish market sentiment had reached climactic levels (often a precursor to a major market reversal), and shorts had piled in. When European officials announced a massive liquidity program, this triggered a steep short squeeze and then a rally that traders could have capitalized on, considering the technical action. Twice during that rally, stocks made shallow, buyable Fibonacci retracements.
After the S&P ratings cut, the market plummeted to depths that traders had believed were impossible in the modern era. The violence of that move has put everyone on edge ever 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 violent swings in that range have made life hard and painful for traders trying to corral it too aggressively.
Looking Back at 2011
I have been on record since 2009 making "bold calls" on the price of gold, as the late Mark Haines referred to 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 had said gold would hit $1,700 to $1,800, but instead it hit $1,900 before weakening over the last month.
I predicted that Apple (AAPL) would see $400, and it peaked at $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 period in its lifecycle. Many people believe that without Apple's visionary and meticulous leader, 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, or 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 believe AAPL has topped out.
My upside target on the S&P was 1325-1375, and we reached that point before pulling back. I believe we will continue to see extreme volatility swings in 2012, and I wouldn't rule out the possibility of the 2011 and high and low being taken out. I believe the European crisis can crash to even more extreme depths before a more definitive way forward is found.
Politics in Washington picked up in 2012 where it left off in 2011. Gridlock over the debt ceiling triggered the S&P default that sent the market tumbling. The idea that any U.S. politicians wanted to see a 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.
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 managing 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 is particularly difficult. There are so many unanswered questions, and frankly so much deception and heresy, that it is hard to know what lies ahead in Europe. The headline-driven market will continue, and the headlines seem to be manipulated every single day. The market is hit with a barrage of rumors each day, and it's hard to ever know which are credible.
As a trader or investor for 2012, you need to have either an ultra-long-term time horizon or a short-term trading approach. Anything in between, in this environment, is too hard to stomach. The wild swings in the market make it difficult to hold on to swing-trading positions, and your timing has to be absolutely perfect to be able to stay with trades.
Technical Areas to Watch
We head into 2012 with positive momentum, and I believe the first step is to outline short-term resistance points. A move through and close above the 1260-1262 area in the S&P 500 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 market's next move.
After we 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 is at 1100-1070. If European bond yields continue to rise and hold above unsustainable levels, I believe we can easily see 1010-1040. If the European Central Bank doesn't step in with massive asset purchases to lower borrowing costs, as it has been reluctant to do, mostly because of Germany, 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 if 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 believe the trade can change several times before we pick a longer-term market direction.
While the U.S. markets continue to be held prisoner by Europe, the gigantic elephant in the room is China. A hard landing in China 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 401(k) and into my son's 529 fund for college savings, but I wouldn't tell my baby boomer parents to put money into the market if they need it. I believe that five years from now, things will be better than the last five years, but next two years are hard to predict. Timing the market 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. That being said, I will be watching two sectors because of their fundamental outlook.
First is the oil-service sector. Personalities from the Street 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 the Oil Service HOLDRs (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 two favorite oil-service names are Apache (APA) and Exxon Mobil (XOM).
The second sector I will be watching is agriculture. 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. Raising a cow for beef requires more corn than making a meal of the corn.
The amount of arable land globally is also decreasing because of 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), Potash (POT) and Mosaic (MOS).
A Tech Favorite
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 believe you just need a discerning eye with the group.
My favorite tech stock for 2012 is Google (GOOG). Google has been in a three-year channel, and I believe it has been building a nice base for a further surge. The stock could see $750-$850 if the market doesn't see a massive correction. Google now has search, video, mobile and the cloud. It trades at a P/E of 14, and it has a great technical pattern. Above $630, it can open up for a big move.
While Chinese stocks made the headlines for all the wrong reasons in 2011, the bear market we have seen in the Chinese market over the past two years presents a great buying opportunity for the long term. Trust only the biggest and most-covered stocks in this market.
I do believe 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 believe Joe Biden will not run with President Obama for vice president. Obama 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 $1,400-$1,440 before hit hits $1,700-$1,740. The U.S. Federal Reserve and the European Central Bank have changed their tone regarding asset purchases, and inflation pressures are waning. If deflation becomes a real concern, gold will plummet.
I believe that Research In Motion (RIMM), after its dramatic fall from grace, gets taken over at $17-$22.
The housing market in China is a ticking time bomb, and I believe it gets hit hard.
Sadly, I believe that 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 believe Amazon (AMZN) is the next former tech favorite to really unwind, and I see it going below $150. Profits are just not increasing at a rate that justifies its valuation.
And if Goldman Sachs (GS) continues to decline, it will at some point take itself private.
Finally, last but not least, I believe we will start a massive bull run in the next 12 to 18 months. Europe needs to do what it takes to sort out the current mess in a bold and decisive way, or else 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.
Market participants must know their time horizon and their risk tolerance. Living and trading within your means is the key to success.