INSIGHTS

On January 05, 2012

Peroni Report - January: Outlook for 2012

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DJIA:  12217.56

 1. DJIA Could Challenge Its All-time Record High During 2012

Although the stock market was impacted by many events – from the Japanese tsunami to the European debt crisis – it reacted with remarkable resiliency.  Near-term technical breakdowns had little follow-through and the DJIA’s ability to consistently reclaim key support levels in short order was a consistent theme.  With so much negative headline news in 2011 it would seem any hints of economic improvement could catapult the blue chip index above 13,000, placing it in the technical ‘clear’ for a run at 14,000 before the end of 2012.

2. Backbone Of Gold Advance Broken

For the first time since 2008 when gold was trading around $850/ounce, the precious metal broke below its 200-day moving average around $1625/ounce in December.  I believe this is a significant intermediate technical violation that could find gold consolidating in a range between about $1450 and $1775 in 2012.  I do not think gold has reached its ultimate highs in this cycle.  Therefore, I view weakness towards the lower end of my anticipated yearly range as a longer-term buying opportunity.  My long range forecast calls for gold to top $2150/ounce.

3. Oil May Be Forming A Launching Pad For Advance to $115+

Similar to the stock market, oil exhibited remarkable elasticity in 2011, ending the year around $100/barrel.  More importantly the formation established in the fourth quarter presents a bullish technical bias.  Oil stocks were shaping up nicely from a technical standpoint by late 2011 and should be a leading sector in 2012.  My expectation is that oil will retest the 2011 highs at $115, but if geopolitical factors play large, a run at the highs may be possible.  It is noteworthy that oil gained as the dollar strengthened in the fourth quarter.  It remains my contention that oil could be portending economic revival on the horizon.

4. Dow Jones Transportation Average Bullish Heading Into 2012

Strength in railroads, shippers and some airlines are giving the DJTA a boost that could fulfill Dow Theorist’s hopes that leading-edge performances in transportation stocks bode well for a sustainable stock market advance.  The theory is that perceived activity on the roads and rails and in the skies is a harbinger of economic growth as movement of products and people increase.  Many stocks in this broad category remain attractive, but I particularly favor the rails and express shippers.

5. The Volatility Index Should Remain In a Downtrend

The volatility index (VIX), which is dubbed the fear index, was oversold leading into 2012.  I would expect some rebound in the VIX early in the first quarter which could indicate some expansive trading movements in January.  In this regard, however, selling best-in-class stocks amid near-term volatility could prove a mistake.  The VIX is in a formidable downtrend following its yearly peak levels struck last August.  A ‘normal’ reaction rebound in the VIX could be into the mid-30’s based on descending channels of resistance.

6. Beleaguered Agriculture Sector Poised to Sprout In 2012

Commodities were generally under pressure through much of 2011 on concerns that the European debt crisis could stymie global economic growth.  While the debt crisis is far from settled, commodities appear to be in short-term bottoming trends that could spawn recoveries in 2012.  One of my favorite sub-sectors in this regard is agriculture.  The long-term technical characteristics of most stocks in this sector point to continued leadership beyond this year.

7. Financials Bottoming - Group Could Offer Nice Percentage Rebounds This Year

Entering into 2012 financials are trending higher from multi-year lows struck in 2011.  There are uniform bottoming patterns among most of the big cap financials that suggest the worst may be behind this group for the long haul. This sector could gain momentum as a favorite contrarian play for bottom-fishers during 2012.

8. Homebuilding Stocks May Portend Improving Housing Data in 2012

Homebuilders and building products stocks fared well in the fourth quarter of 2011.  The breadth and uniformity of the recoveries within this sector could bode well for the short-term outlook in housing.  Better housing data could indirectly benefit stocks by contributing to improvement in consumer confidence.

9. Fed Transparency Could Bolster Stocks

The Federal Reserve Bank has announced a plan to publicly forecast where its policy makers believe interest rates will be in coming quarterly or yearly periods.  This could be seen as a stimulus, of sorts, by reducing speculation as to when and by how much rates might change, allowing companies to more confidently draft their business strategies.  Coming off a year of dramatic uncertainties, the Fed’s plan may help by promoting transparency.  In my opinion, this is a bullish development, especially given the current state of investor trepidation.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.