Thursday, January 5, 2012

I almost missed it - S&P 500 finishes lower in 2011

A year ago when I was asked where I thought the S&P would finish the year I did not hesitate in my resolute declaration that it would be lower. I said this even as the market was continue to climb and economists were saying that the world had averted financial disaster. I was nearly proven wrong and may have actually saved myself.

The S&P finished out the year almost exactly where it started, falling just .04 to 1257.60 from 1257.64. This past week I was selling whenever the index was over 1262, helping to create that .04 loss for the year. I finished the year with 82% cash.

A few months into the year many pundits were declaring that stocks were still undervalued and suggested that their devotees add stocks to portfolios. I called these people [those buying the S&P at over $1300] "stupid".

I maintained a 100% cash position until August of 2011. Sure I missed out on much of the gains but, more importantly, I also missed out on the decline. I started buying back in as the S&P dipped below 1230 and more heavily at >1140.

My target low, and "all-in" point, of 1040 didn't materialize this year. The low was about 1075. My year end number that I had been thinking of was 1245 which would leave the market down 1% not inclusive of dividends which would have left it up 1%.

Not all was lost though. I did finish the year with a 9% gain. That outperformed the 75% of professional fund managers who experienced a loss. I was also much closer on a year end target that the most notable Wall Street prognosticators. I wrote about them here back in November.

While my 1245 prediction missed the mark by 1% to the downside it was far less off the mark and less hurtful than such predictions of 1500 by Goldman Sachs or 1550 by Binky Chadha, chief U.S. equity strategist at Deutsche Bank. They missed the year end tally by a whopping 19 and 23% to the upside, respectively. called Chadha's miss "an audacious and stunningly wrong prediction." Essentially Goldman Sachs and Deutsche Bank were saying that long-term investors should buy in at any price under their year end targets. That means every day of the year, including the high point of 1370.58 on 02 May 2011.

So, as the year begins with the same scenarios as existed a year ago I boldly put my predictions to print.

The S&P 500 will trade in a range of 1108-1352. I feel that there is a slight chance that it will trade as low as 992 but only for minutes. Breakout to the upside will be difficult as most investors will be reluctant to enter the volatile market. Stock mutual funds again saw an outflow in the past month. I believe outflows will peak mid-year when the market is at it's lowest point.

The S&P 500 will finish the year near it's highs; 1323.

The "all-in" trade on the S&P 500 is 1065. That is the can't go wrong price where it will definitely be exceeded but is so low that missing out on a move lower won't hurt.

Europe will continue to be the catalyst driving US equity prices. The S&P 500 has significant exposure to the European market and a strong contraction there will have dire consequences here. I look for European difficulties to reach a peak around April. That month may prove to be a good buying opportunity for a bounce.

The S&P 500 will continue to be a traders market. Limit orders on the upside and downside should always be in place. Investors should expect a return of 20+% for 2012. A professional fund manager who cannot accomplish that shouldn't be in the business. Especially if he or she can't beat a part-time novice like myself.

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