The year is nearly over, but the volatility we’ve come to live with in 2011 is by no means over yet. On Wednesday, stocks sold off sharply as traders opted to bank the gains they captured in last week’s bullish action. Of course, this time of the year is characterized by very low trading volume, so the action during the past couple of weeks shouldn’t be read into too deeply. I do, however, think that the major takeaway from today’s action is the technical breakdown of the S&P 500 Index.
If you take a look at the chart below, we see that the broad measure of the domestic equity market has descended below the all-important 200-day moving average. This technically significant level has kept a lid on a significant market rally four times since October, and that tells me that there’s a lot of bearish sentiment out there among investors. In fact, today’s decline in stocks has put the S&P 500 back into negative territory for the year.
The chart here also shows just how incredibly volatile the year’s market performance has been, particularly since the July-August plunge. To be certain, this has been one of the hardest years for investors to navigate in recent memory. I think the key to coming out intact in this kind of environment is to consider cash your best friend. We’ve done just that in my Successful Investing advisory service in 2011, and it’s helped us weather this market storm nicely.
If you’d like to find out how you can keep your head about you when the rest of the market is seemingly losing theirs, then I invite you to check out Successful Investing today.
The Year’s Top Market Stories
What a year for big financial news headlines! Sure, every year is chock full of huge developments influencing the markets, but this year it seemed as though there were more than the normal amount of big events. Here’s a list of what I think are the most important market stories in this tumultuous 2011.
Occupy Wall Street — The movement that started in New York City quickly became a nationwide phenomenon. And while the movement’s message is far from cogent, protestors did unite around issues such as the unfairness of bank bailouts, crony capitalism and what they perceive as the negative influence of growing income inequality.
Osama bin Laden Killed — The killing of this world’s most notorious terrorist didn’t have a real impact on the markets, but it did let the world know that the United States takes its justice seriously. The death of the Al Qaeda leader was a moment of long-awaited victory for a country deserving of retribution.
Steve Jobs Death — The death of the Apple (AAPL) co-founder and former CEO saddened me deeply. Jobs was an incredible genius who changed the world for the better with his innovative products. He created billions of dollars in wealth for Apple shareholders, and he provided all of us with beautiful tools to increase our personal productivity. The world is going to miss Steve Jobs.
Arab Spring — The democracy movements in the Middle East this year were astounding, as they occurred in formerly stalwart dictatorships such as Egypt, Libya, Syria, Tunisia and Yemen. The ousting of Egypt’s Mubarek and Libya’s Gaddafi were the highlights of what rightfully has been deemed the Arab Spring.
Japan Earthquake — The horrible earthquake off the coast of Japan was followed by a huge tsunami and a near meltdown at the nuclear power plant in Fukushima. The economic and human costs of this tragedy are still being felt, and likely will be felt for years to come.
MF Global’s Bankruptcy — The fiscal malfeasance at securities firm MF Global rocked Wall Street. Former New Jersey Governor, U.S. Senator and Goldman Sachs (GS) Chief John Corzine doesn’t know where $1.2 billion in customer funds went. Corzine famously told Congress, “I simply do not know where the money is.” This pathetic episode tells us that politically connected Wall Street titans aren’t immune from putting investor capital in jeopardy.
S&P Outlook Downgrade — In April, ratings agency Standard & Poor’s downgraded its outlook on the U.S. debt to negative from stable. Then in August, the agency cut its long-term credit rating on the U.S. government for the first time in history, lowering it one notch from AAA rating to AA-plus. S&P cited the political gridlock in Washington, and a lack of willingness on the part of politicians to confront our nation’s serious fiscal issues, as reasons for the downgrade.
Debt Ceiling and Super Committee — The S&P downgrades were largely a result of political gridlock on issues such as lifting the debt ceiling and reining in debt. The failure of the so-called “super committee” to manage to agree on reducing the rate of spending by a relatively miniscule $1.2 trillion during the next 10 years highlights the enormous failures in Washington in 2011.
European Debt Crisis — Without question, the biggest market story of the year is Europe’s debt crisis. The euro zone still faces serious fiscal issues, despite efforts by leaders in the region to cobble together a bailout agreement. Until the structural problems of too much spending and too little revenue are fixed in countries such as Greece, Italy and Spain, look for more pressure to be put on the markets due to the European debt crisis in 2012.
ETF Talk: Don’t Go Long the Euro Just Yet
The biggest story going into 2012 likely will be the fate of the euro. In recent months, we have witnessed politicians, finance ministers and central bankers in Europe struggle to find a solution to a terribly difficult fiscal situation there. So far, their answer seems to be to issue more euros to cover runaway deficit-spending. Indeed, total assets rose 10% to €2.73 trillion just last week in the most recent financial statement of the Eurosystem, which comprises the European Central Bank and the national central banks of its member states that use the euro as a common currency. The Eurosystem is especially important because it is the monetary authority of the euro area.
If you think the worst for the euro is behind it and that the currency will recover from its 2011 travails, one way to invest in that belief is through the CurrencyShares Euro Trust (FXE). The fund is designed to track the price of the euro, net of Trust expenses, which are expected to be paid from interest earned on the deposited euros. In my view, do not be surprised if FXE trends still lower as 2012 begins. While the dollar/euro exchange rate will continue to fluctuate, analysts predict a range of $1.20 to $1.50 for 2012. FXE currently is trading at $129.00, which equals a $1.29 per euro exchange rate.
As the Eurosystem’s balance sheet continues to expand at an alarming rate, the situation should send the euro lower. While a devaluing euro is a precarious road for Europe to travel, it is a boon for the value of the U.S. dollar. Investors worldwide have been moving their assets back into dollars since the Fed’s quantitative easing part II (QE2) program ended in 2010 and the increased issuance of euros began. The latter trend is expected to continue into 2012 as the more financially sound European nations, such as Germany and France, support their deeply indebted partners with financing through the European Central Bank.
On the other hand, the U.S. dollar should continue to perform admirably. The dollar saw a nice jump of nearly 1% this morning as the currency strengthened after Italy sold €9 billion of six-month Treasury bills. While Italy’s auction was viewed positively by many observers, debt continues to be piled on the country’s already massive deficit. Initially, the dollar weakened after the sale as yields in Europe fell. But savvy investors realize that the Italian debt auction is only a short-term stop gap. A more comprehensive plan still seems elusive, with many European citizens protesting against austerity measures. With European economic growth slowing and the European Central Bank issuing new euros at a brisk pace, the devaluation of the euro seems destined to continue in the New Year.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.
High Risk Dead Ahead! — But the Next 13 Minutes Can Help You Prepare
Investing in the equity markets is always a pursuit fraught with peril, but these days, the risk meter on your money is running dangerously in the red.
You see, I think there’s high risk dead ahead for investors, as the market faces a trifecta of negatives itching to rob you of your hard-earned wealth.
I’m Doug Fabian, president of Fabian Wealth Strategies. I am of the opinion that investors will have to deal with some major headwinds going forward. Those headwinds could blow down the house on your wealth in 2012.
First off, Europe’s debt crisis still isn’t solved, and there are no plans in place likely to stave off a European recession. That recession likely will spread around the globe in the year ahead, and that’s going to make things very tough for equities. Then there’s the political acrimony in Washington, D.C. As we all know, 2012 is a presidential election year, and that means that more political gridlock in our nation’s capital is a done deal.
To help investors deal with what I think is going to be a very difficult market environment in 2012; I’ve recorded a special audio report titled: 2011 Year-End Market Alert.
This audio podcast is just a little more than 13 minutes, but that’s enough time for me to show you why I think 2012 will be such a challenging year; why the upside potential in stocks pales in comparison to the downside risks; and why success in the year ahead will require proactive decisions designed to put your money in a defensive posture.
I believe that 2012 will be a crucial year for investors, a year where making the wrong decisions could spell disaster for your wealth. On the other hand, making the right decisions could help set you up to prevail against whatever peril the market throws your way — and making the right decisions starts off by listening to my special 2011 Year-End Market Alert.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Aristotelian Thoughts on Friendship
“Perfect friendship is the friendship of men who are good, and alike in excellence; for these wish well alike to each other qua good, and they are good in themselves.”
The holidays are a time for family, but they are also a time for good friends. As we begin the New Year, I wanted to offer you what I think are some very profound thoughts on the nature of friendship from the greatest philosopher of all time, Aristotle. I hope 2012 brings you many perfect friendships, as they are indeed good in themselves.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else.