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2011: The Year of the Market Timer

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Taking a look into the future of stocks, the market, and the economy.

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Economic Factors

In my opinion, resistance to the actions of the Fed will continue to grow. Ron Paul, the new chairman of the Monetary Policy Subcommittee, made the statement that he would like to disband the Fed, but he believes that it will self-destruct on its own before that is procedurally possible. Strong words from an opinionated man, but he is not alone in his sentiments in that regard.

There are two strong factions right now in terms of economics: 1) those who say we need to immediately cut deficits, impose austerity measures, endure the pain, and focus on a more disciplined future; and 2) those who say austerity, right now, would be detrimental to the recovery. We must stay the course by continuing to prop up asset prices until the training wheels can come off. Only well down the line can we safely consider cutting deficits.

I fall more into the first group, because I believe any positive economic readings we see that are spun endlessly as signs of a "recovery" are a farce. Common sense says that you cannot perpetually spend more than you have. At some point, the music will stop. There will come a time when the dollar is not the only reserve currency, when foreign governments will not depend so heavily on the United States for their own prosperity, thus will be less forgiving in regards to our self-serving economic policies. We must start preparing for that day.

Economics has been made out to be some secret, ultra-complicated formula that the average American is too simple-minded to understand. In reality, if we followed our "simple" intuition and focused less intensely on growth at all costs, we would be in a much better spot than we are now. When economists make condescending remarks, I ask the question: where has your expertise and leadership gotten us? We need to tug on the reins before it's too late.

The other ginormous elephant in the room is the state debt and budget crises. California is close to requiring a bailout or defaulting under their huge debt burden, and several other states are not far behind. This is one of the many stories I believe will take shape starting this year, and how we deal with these crises could determine the pace of the "recovery."

What 2011 Will Bring for Markets

In my opinion, 2011 will bring a relative return to normalcy. For the markets, I believe it will be the year of the market timer. We will not see huge moves across the board and the bullish action will likely be selective. Take 2011 month by month and quarter by quarter, because the situation could certainly deteriorate or strengthen based on a number of factors. It will be a year to be nimble and flexible with your capital.

My top side target for the S&P in 2011 is 1350-1375, while downside support would be 980-1040 in a reasonable worst case scenario. However, it appears that our government and Federal Reserve will continue to do everything in their power to keep the "recovery" on track, even if much of it is an illusion. At some point, we will have to put an end to the incessant money printing and tighten our belt, and it will be interesting to see how the market reacts to that.

I agree with Meredith Whitney that we will need to pay close attention in order to attempt to time this market. Uncertainty creates opportunity, so while unemployment and housing are huge drags, they are likely close to a bottom if not already there. Technology continues to accelerate while the Nasdaq trades at just more than half of what it did a decade ago.

Stocks and Sectors

Cloud computing stocks have become the latest craze for investors as cloud technology looks set to become the next game changer. My firm listed VMWare, Inc. (VMW) as one of our go-to stocks at the beginning of 2010 and it has more than doubled, while other cloud stocks like Riverbed Technology Inc. (RVBD) and F5 Networks Inc. (FFIV) also performed well. Cloud stocks recovered from an October disaster and most are making new highs. EMC Corp (EMC) is another great pure cloud play.

Rare earth became a hot commodity as China decided to cut export quotas. Many traders made their years trading these wildly volatile (and highly speculative) stocks like Molycorp (MCP), Rare Element Res Ltd. (REE), China Shen Zhou Mining & Resources (SHZ), and Avalon Rare Metals (AVL). These stocks were a short term trader's dream. There will be new stocks and sectors that will come into vogue, and you should be flexible and nimble enough with your capital to take advantage of emerging trends. (Also read How China Came to Dominate the Rare Earths Market.)

I also believe your money is in good hands with some tech leaders like Apple Inc. (AAPL) and Google Inc. (GOOG), which continue to stay ahead of the technology curve. Both could use a stock split. Facebook, when it does go public, will be another interesting stock to watch. I also believe tech dinosaurs Microsoft Inc. (MSFT) and Cisco Systems Inc. (CSCO) could get a boost in 2011 as they reemerge as innovators and provide value.

I also believe two of the most downtrodden bank stocks, Bank of America Corp (BAC) and Citigroup Inc. (C) can revert somewhat to the mean and get to $7-8 and $17-18, respectively.

As a speculative play -- after riding Las Vegas Sands (LVS) and Wynn Resorts (WYNN) for a nice ride, I do think if business gets better so will Vegas, where MGM Resorts (MGM) does most of its business. Seems like $22-$25 could happen here.

One story to watch closely is the agricultural group and specifically the fertilizer names. As population growth and affluence in developing countries increase, demand for food will grow considerably while the amount of arable land will not. Potash fertilizer is necessary to grow crops where you otherwise could not. That is why PotashCorp of Saskatchewan (POT), which controls 20% of the world potash supply, has been subject of various takeover rumors at a significant premium and why it is one of my firm's favorite plays into 2011. If you want a more diversified agricultural holding, you could consider the Market Vectors Agribusiness ETF (MOO), which has performed well since we highlighted it here and we feel it will continue to perform well.

I like Japan as a country ETF play. Look to the iShares MSCI Japan Index (EWJ). I think they are due and you can see 20% here. (Also read Japan's Economy and USDJPY in 2011.)

Finally, on to Gold. I first mentioned gold on CNBC in 2008, and we hit my stated technical target of $1350 this year. The game has changed though and the gold trade has evolved. I definitely feel gold has more upside, as do other precious metals like silver. My cautious gold target is $1600-1800/ounce, but I could easily see it moving above $2000.

Conclusion

The market was strong in 2010 after the Fed's intentions became painfully clear, but the economy is only just showing small signs of a meaningful recovery. There are many challenges that must be met and changes that must be made to in order for us to truly get back on the right track. However, I am an eternal optimist, and despite lingering concerns I believe we are in a great position to emerge from this crisis stronger than we entered it. There will be investing opportunities in 2011 if you remain selective and patient. Evaluate your performance for 2010, redefine your strategy, and commit to being an informed market participant in 2011.


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No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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