Five Market Trends to Watch in 2012

By: Jim_Farrish

The new year begins with a big question mark hanging overhead. The second half of 2011 left many investors weary of what to expect relative to the economy, Europe and other news. The outcome will be based on current trends playing out and new trends developing. Following these trends as they unfold, along with the opportunities they present will play an important role for investment results. The following are trends or potential trends to follow as we start 2012:

1)  Interest Rates - The current yield on the 10 year bond is 2%. While that seems low, in September the yield hit a low of 1.8% as the fear relative to Europe pushed money into safe haven investments. In 2011 many predicted that interest rates would rise along with the equity markets. The predictions were initially right as the yield moved to 3.73% in February. However, the issues in Europe had other plans, and as stated, they slowly eroded to the low as confidence evaporated. As we face another year of uncertainty the outlook is for yields to rise as the economy improves and stocks move higher. The first hurdle is a move above the 2% mark and then 2.2%. Watch for a trend reversal in the yield before jumping on the bandwagon to short treasury bonds. If the trend reverses, take advantage of the opportunity, but patience is key as it unfolds.

2) Europe - In reference to the comments in number one, this is the primary factor that will impact interest rates. However, it is also one of the key factors as to how stocks will perform. There are two issues to track relative to the improvement. First, refinancing the debt in the first quarter of billions in sovereign bonds from Germany, France, Spain and Italy. The key is to find the money at the same or lower interest rates. If this can be accomplished successfully it will go a long way to helping the confidence relative to Europe. Second, creation of a euro bond. Many are calling for this to provide liquidity and stability to the EU as the financial challenges are dealt with longer term. If the EU fails to establish this process it will produce some angst towards the situation longer term. Both are keys to watch looking forward.

3)  Real Estate - Will this unfold to be the year of the housing bounce? The data has gradually improved over the last three months and the expectations are for the improvements to continue. Watch the homebuilders as a benefactor of this progress. While the inventory issues relative to foreclosures and short sales remains a challenge, the builders have found demand in the $100-200k price level. There are improvements in parts of the US and the outlook is positive. Watch for this trend to improve and the sector along with it.

4)  Value Stocks - The dividend stocks have been one of the big predictions for 2012 on the upside. While I don't disagree with the rational or arguments in favor of these stocks, they need to find a catalyst for sustainable growth. Buying stocks for dividends alone is not a winning proposition, but in the current yield, environment it is a factor. The reality is in the trend. Looking at a chart of DVY, iShares DJ Select Dividend ETF the trend is moving up off the August low, but is stalled at resistance near the May 2011 high. Watch as this trend unfolds along with the catalyst to push the sector higher as the year unfolds.

5)  Earnings Growth - The projections for growth in earnings of the S&P 500 index is 10% for 2012. On the surface that sounds good, but the reality is they have been lowered in light of the global economic outlook. The trend to watch relative to earnings is a surprise to the upside. If they begin to trend higher and GDP growth is better than the 2.5% projected for the year it will provide a positive catalyst for the broad market. The first signs will come from the fourth quarter data to be released starting in the third week of January. Watch the trend and play accordingly the broad market indexes.

This promises to be a year of news, opportunity and disappointments. The ultimate direction of the broad markets will be driven by the trends that develop. Other issues or potential trend influences will come from the political arena with the presidential election providing more than we can ask or imagine. The central banks around the world will play a role in money supply or liquidity to the financial markets. Too much could result in inflation fears and too little could stall the progress in Europe's sovereign debt dilemma. The emerging markets will face food shortage issues and a stronger global economy will stir energy shortage issues. Bottom line... It is all about the trends that develop. These and more will be on our watch list as the year unfolds. Our focus in on finding the resulting investment and trading opportunities in each resulting trend.

Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

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