Stocks Bull Market Relief Rally Sends Dow to 5.5% Gain for 2011 Before Dividend Income
Stock-Markets / Stock Markets 2011 Dec 31, 2011 - 01:13 PM GMTBy: Nadeem_Walayat
The DJIA closed an extremely volatile 2011 up 5.5% at 12,217 (11,577) before dividend income is taken into account, which in terms of the indices is about the minimum return one should expect from long-term stock market investing, so as to beat Inflation. Now before readers start stating a string of indices that failed to end the year in positive territory i.e. showed significant divergence to the DJIA. In which respect the Dow has always been my primary stock index for analysis and trading for the past 25 years, and highlights the mistake many analysts tend to make which is to play pick and mix with stock indices, such as the perma-bear's who jump from index to index, whichever with the benefit of hindsight supports the bear point of view, which at this point would have many opting for the european stock markets, China's SSE (-21%) or for a really big 'ouch' factor India's BSE (-24%), though it is unlikely the bear trends in any of these markets would have actually been capitalised upon since most are only being mentioned with the benefit of hindsight.
So my advice for all seeking to trade stock index futures, is to pick ONE index and then stick to it, and don't confuse the situation further by playing pick and mix with indicators on the indices because your meant to be trading the index and NOT the indicator. Price is always King, which where my analysis is concerned means the Dow, which ended 5.5% higher coupled with an intra-year positive swing of 18.5% (low to high). Whilst many may refer to the likes of the S&P500 ending flat, they need to take a closer look at relative out-performance of dividend stocks that I have been banging the drums for all year (and before).
About here is when I start deviating form the script that most market analysts are engaged in pumping out at this time of year, which is geared more towards marketing towards seeking to expand paid subscriber bases, because the reality of the stock market trend for most of 2011 is that the observed volatility was outside the realms of market expectations of virtually EVERY ANALYST.
No one could imagine at the start of the year that there would not only be so much volatility but that there would be such a breakdown between global stock markets especially when those that were supposed to decouple (emerging markets) were supposed to out perform the likes of the Dow when instead the exact opposite transpired to as much as 30% difference in trend!
Well, okay the perma-bears claimed victory during the depths of the summer- autumn correction just before they were once more hit by subsequent rallies as illustrated by our friend who did the rounds on the BBC just as the stock market was bottoming in late September / Early October.
"know the stock market is finished."....
The Dow is up 13% since he spoke and the FTSE is up 10%.
The below graph portrays the price action in terms of my trend expectations during the year. The Green sections indicates first half of the year trend expectations when even the likes of Dow 14k by year end seemed possible following a brief summer correction that would provide another good buying opportunity.
However going into August not only did the summer correction prove far more severe than expected. The drop below Dow 11,600 was NOT part of the script, but more than that the stock market entered into a trading range which whilst presenting good ongoing opportunities to accumulate into the bull market (the greater the deviation from the bull market peak the greater the buying opportunity) however this meant that the amount of time left to achieve an year end new bull market high (above 12,876) never mind more fanciful targets such as Dow 14k was becoming increasingly improbable.
By year end, the DJIA just did not make it anywhere near a new bull market high and instead came in at virtually the lowest end of the year end trend expectations channel which is a major sign of weakness and thus prompting me (as of last analysis) to take the ongoing rally to sell into to reduce risk for 2012 (when in doubt, get out) that just on a technical basis looks likely to be worse than 2011.
Stock Market Expectations for 2012
Given the level of extreme uncertainty, I am going to hold off on generating a projection for 2012 until I have completed fundamental analysis on the economy over the next week or so, but what analysis I have done to date suggests the all prevailing cries of Recession 2012 may prove premature, a recession is definitely not a done deal, not for the US, not for the UK, in fact the US is looking uber strong (to me anyway), which is a positive for another year for Dow out performance, though I am not so sure about Europe, that depends on whether or not the powers that be stop listening to the clueless academics and realise what they need to do to save the euro-zone economy which my next in-depth analysis will explain how it can be done with relatively little pain, and yes it has its basis in the Inflation Mega-trend.
Meanwhile, my last analysis still stands and more so given the weakness of the actual closing level of the Dow for 2011.
As things stand today, the first half of 2012 is not looking good for stocks and other asset markets, we will probably see several market panics in response to the ongoing euro-zone debt and economic crisis, and the second half needs work to determine to any reliable extent, but I am assuming that we will see the euro emerge intact from this crisis as a consequence of global coordinated central bank QE's and other special measures that will succeed in igniting asset price recoveries during the second half of 2012, hopefully this foggy picture will become much clearer over the next few weeks as each piece of analysis is completed.
The technical bottom line for the stock market is is that the year end close of Dow 12217 is pretty weak, about the weakest I could have expected the Dow to close at, failure to close at a new bull market high of above 12876 does not bode well for the indices for 2012. This definitely demands more in depth fundamental analysis before I turn to a fine tuned technical trend forecast.
Your analyst relieved by the end of year relief rally wishing you all a Happy and Prosperous New Year.
Source and Comments: http://www.marketoracle.co.uk/Article32390.html
By Nadeem Walayat
Copyright © 2005-2011 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.
Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
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