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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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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

See more from Scott Redler at T3Live.com.

With light trading volume and muted action taking us into the end of the year, it's time to start looking forward to 2011. 2010 was certainly an eventful year, one full of natural disasters and oil spills, growing distrust of Wall Street, distaste for government, fervent political and economic discourse, inspiring stories, and shocking revelations of systematic fraud. But any way you slice it, 2010 was a great year for the stock market. What does 2011 have in store?

Market Evaluation

If the past few years are any indication, 2011 will develop its own distinct identity. As our economy entered a painful recession and the housing market faltered, 2007 was the year of the bear. The pain and panic continued in 2008, and Gold became the buying opportunity of a lifetime as a safe haven investment. 2009 was an opportunistic investor's dream. Strong companies traded at a steep discount after the panic selling of the two years prior, and those who were greedy when others were fearful have enjoyed tremendous returns.

The market in 2010 was a drama in two parts. The first half of the year saw a defined trading range as investors evaluated whether the economy could sustain the recovery. In the second half of 2010, unwavering support from the Federal Reserve helped asset prices. And the market, which took off following the infamous Jackson Hole summit, is now trading at multi-year highs.

The Headlines Kept on Coming

Aside from the market and economic headlines, we got a little bit of everything in 2010. We saw devastating earthquakes in Haiti and Chile. The BP plc (BP) oil spill became a national disgrace and tragedy. Wikileaks lifted the lid on embarrassing inner workings of our government and shocking truths about the war on terror. QE2 became the hot dinner table conversation piece, with everyone from foreign officials to Sarah Palin weighing in with strong words. Republicans turned the table on the Democrats in the mid-term elections; politics continued to morph into a destructive game rather than the engine for change we desperately need.

The Tea Party emerged as a voice for frustrated American taxpayers unwilling to sit idly by as special interests run our lives and determine our lot. Pervasive and widespread fraud was exposed in our mortgage and banking systems. 2010 was an altogether tumultuous and exhausting year, but Americans are beginning to adjust to a "new normal" if you will. We now face the reality that we must fight tooth and nail to hold government and corporations accountable. We must change our ways if we are to remain the preeminent world economic superpower. A startling number of eager Americans are still without jobs, a fact that must be addressed if we are to truly drag ourselves out of this rut.

The Flash Crash opened up a whole new Pandora's Box. Technology has evolved much faster than regulatory bodies, and we need to work diligently to find a market structure that works more effectively. High speed traders have come to rule the market, often to the detriment of the retail investor. In order to restore trust and prevent calamity, regulators need to work urgently to correct our flawed market structure.

The foreclosure crisis, fraudclosure, foreclosuregate, or whatever you want to call it continues to be a deeply disturbing story of what companies are willing to do to try to get ahead. Robo-signers, banks foreclosing on homes without a mortgage, and the hundreds of other troubling prongs of this debacle tend to make me pessimistic about people. Many fear it could take a decade to sort out this mess in the courts, and the crisis will continue to prove a thorn in the side of the long-awaited housing and economic recovery.

Finally, the Chilean miners demonstrated the strength of the human spirit to prevail in the face of adversity. We are resilient creatures, and when we work cooperatively, we can overcome most any obstacle in our way. The story of the miners was so captivating because it came in such stark contrast to the polarized reality of today's world and today's America. Hopefully, we can ramp up that spirit in 2011.

The Great Blizzard

It is fitting that 2010 would end with a historic snowstorm here in New York City, and that disgruntled city workers would drag their feet and prove inept at getting the city back operating smoothly. The storm has been a microcosm of the year and the economic crisis as a whole. We watched overnight as clear skies gave way to two feet of snow, only a couple of weeks after Spring-time weather. Just when we thought it couldn't get any worse, the snow kept on coming.

Next thing we knew, you could barely open your front door. We were buried up to our waste in snow. Trains were stuck on the tracks and cars in the street. The heartbeat of the city -- the engines of activity -- were silent, and a bumbling crew of sanitation workers still do not have all the streets cleared four days later. There is outrage, finger pointing, anger, and distress. It has been a big wet, dark, cold, stormy mess. But the sun is starting to peak through.

The forecast calls for weather in the 40's this weekend that could melt much of the snow. Only weeks after it was in the 60s, we are now satisfied and content if the temperature stays above freezing. Americans, only a decade after enjoying low unemployment, historic economic growth, and unrelenting optimism, are now ecstatic to find even part time work. We may just be entering the heart of Winter, but Spring will come. Workers and citizens will be better prepared for the next great blizzard, which will inevitably come at some point.

Mother nature is mercilessly unpredictable; human nature can be equally destructive. Fear and caution rule the day, but they will give way to greed and recklessness of equal proportion. Climate change has led to more extreme weather. Technology and globalization have led to a more fragile and volatile world. In both cases, collectively we must do everything in our power to move forward while minimizing the negative side effects, and as individuals we must prepare to cope with the implications of a "new normal."

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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