Happy New Year!
Well, it is a New Year. Many investors and traders begin the year with a clean slate. The idea is that you are starting from zero. Past performance is no guarantee of future results. Each year is unique in terms of the nature of opportunities that might present themselves. Remember that we must strive to look at the road ahead, not the rear view mirror.
Consider these words of caution from Gary Smith:
"I always approach new trading years with great trepidation. I want the market to show its hand, to tell me what it wants to do. I'm always leery of what occurs on the first trading day of the year. I remember too many Januarys when the market would begin the first trading day in one direction, and then a few days later violently reverse that direction."
Source: Gary Smith, How I Trade for a Living, pages 113-114.
Last night, I reviewed The Right Stock at the Right Time: Prospering in the Coming Good years by Larry Williams. I credit this book with putting me on notice about the 2007 - 2009 Crash back in 2003. Williams suggested that the stock market has patterns that repeat every decade. The last third of a decade is prone to be a time of crashes and panics. Note that the Crash of 2008, the Crash of 1998, the Crash of 1997, the Crash of 1987, the Bear Market in the late 1950s, the Crash of 1929, and the Panic of 2007 all happened in the final third of a decade. So, it pays to be alert to crashes and panics in the final third of a decade. Second, the best buy opportunities seem to occur at the very beginning of a decade. Consider that August 2010, October 2002, 1992, 1982, 1962, 1952, and 1932 were all excellent buying opportunities. It pays to wait for these times at the beginning of a decade when the market is oversold at unsustainable levels. Third, buy opportunities tend to recur every four years. The rule is not perfect but, if you wanted to put probabilities on your side, it was wise to buy in 2002, 2006 and 2010. I suspect that we will see another ideal buy moment in 2014 as well. Williams has provided the proverbial keys to the kingdom, as I see it. Remember that I read Williams' book in 2003. I became convinced then and there that we would have a panic in the final 1/3 of the decade. I remember warning my office colleague, Joel, in 2004 that a panic was coming down the road. I didn't have a crystal ball but I had something better-- I had read Williams' book. You should do the same as a long-term buy and hold investor.
Now, my biggest inner conflict is that I have read the doom and gloom work of Daniel Arnold (The Great Bust Ahead) and Harry Dent. Their arguments make sense to me that we will face the Depression of a lifetime due to demographic trends. So, my opinions based on fundamentals are uber bearish. Wisely, I have learned that investing and trading is about making money, not opinions. If the Great Depression II does not happen, I will be surprised but I will take my cues from the behavior of the market. Arnold and Dent may be great analysts but there is a time for analysis and a time for making money. (For an example of how great analysis can cloud your judgment, read about Jesse Livermore's disastrous decision to follow another trader's opinions in the cotton market. Edwin Lefevre, Reminiscences of a Stock Operator, pages 152-155. See also Nicholas Darvas' sad tales of listening to others for stock tips in How I Made $2,000,000 in the Stock Market, pages 8-9)
So, what does this all mean for 2011?
In my humble opinion, the best I can do is suggest possible scenarios. The arch of the decade should be up (unless Arnold and Dent are correct). One possibility is that the market continues to go up into March/April when we have a traditional sell-off until May. I strongly believe that May 2011 will present a good buy opportunity. I will be ready. Our Club will be ready. Another possibility is that the market goes up for the first two trading days in January, thus providing a parting gift to the La Jolla Fisherman. After that, we see a rapid and dramatic drop in the market until around January 15. This drop provides a wonderful buy opportunity, maybe the buy opportunity of the year. The rest of the year is choppy since 1257 on the S&P 500 Index is very strong and substantial resistance. We won't go through 1257 on the first or even the second attempt. The third attempt will be the charm. At this point, even the most bearish Elliott Wave folks recognize that we are in a substantial bull market. Arnold will be proven wrong. A final scenario is that the market tops out around the end of January and then drops all year into an October bottom just like 2001. I don't think this will happen but the market will tell me whether a rise into the end of January is on the menu.
The wild cards for the year are the European debt crisis, the rising interest rates in Asia, and Quantitative Easing II. I don't care whether these cards are objectively good, bad, or indifferent. What I do care about is the market's reaction to these cards. If the market continues to shrug off these inconvenient truths, then I will know that the Bull Market very strong. If the market starts to care about these issues, that will be the sign that the character of the market has changed. In a Bull Market, bad news is discounted and ignored. In a Bear Market, good news is ignored and discounted.
Conclusion.
If I had to venture an opinion, I would say that the first two trading days of January will be up days. These days would represent the end of the Santa Claus rally based on the research of Hirsch in the Stock Trader's Almanac. Then, the market would drop into January 14/15. This drop would take the S&P 500 Index back to the 1180 level. It would feel bad at the time but, in actuality, would represent the best buy opportunity of the year. The rest of the year would be choppy as we went back and forth in a wide ranging trading range between 1180 and 1257. Finally, the year would end up with a clear thrust through resistance @ 1257.
That's my best opinion this New Year's Day morning. As always, I will invest and trade the market's behavior, not my opinions.
May we seize opportunity this year with confidence and grace!
Wink
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1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
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