Here are my remaining themes for 2011 – Six through Eleven (a continuation of 1-5)
6. QE2, the $600 billion program where the Federal Reserve buys long dated US Treasury Securities has been a failure so far. The yield on the 10-Year was 2.334 when Fed Chief Bernanke touted QE2 in October only to see the yield nearly 125 basis points higher in December. The primary intent of QE2 was to lower longer-dated US Treasury yields. Yields held this week’s value level at 3.494 again on Wednesday. There is risk to 3.75 to 4.25 in 2011, but with or without this weakness, the 10-Year yield will decline to 2.75 to 2.50 during 2011.
7. Comex Gold has gone parabolic, and therefore you cannot predict how high gold prices can climb. I do know that corrections will be fierce and painful for those that buy strength instead of weakness. The 2011 neutral zone is between $1350 and $1450.
8. Nymex Crude Oil is headed back above $100 per barrel according to most experts. I cannot rule that out for 2011, but the downside is more significant given weekly closes below the $87 per barrel area. If gasoline stays above $3.00 per gallon demand on Main Street will slow down and will be a drag on economic growth and job creation.
9. Problems among the PIIGS nations denominated in euros will trump problems at the state level in the USA. This will keep the euro versus the dollar in a trading range. We will begin 2011 with a quarterly pivot around 1.3150.
10. US stocks show strong technical characteristics. The S&P 500 is above the 61.8% Fibonacci Retracement of the decline from October 2007 to the low of March 2009 at 1228.74. Dow Theory had a Buy Signal in early November and another confirmation in December. The Dow Industrial Average – I project downside to 9,375 in the first half with a rebound to 11,500 in the second half. Strength above 11,500 will return to 11,500, and the 2011 close will be at or below 11,500.
11.ValuEngine.com indicates that equity fundamental are not cheap. Fifteen of sixteen sectors will begin 2011 overvalued according to ValuEngine. The normal range for the percent undervalued or overvalued stocks is 35% to 65%. We will begin 2011 close to the low end of the range for undervalued stocks and towards the high end for overvalued stocks. Because of the battle between the technicals and fundamentals, stocks will be reversal-oriented in 2011 and be little changed year over year.
Tracking the US Capital Markets – US stocks are overvalued fundamentally and overbought technically on both daily and weekly charts.
- The major equity averages remain below this week’s risky levels as the year draws to a close at: 11,629 Dow, 1269.4 SPX, 2682 NASDAQ, 5215 Dow Transports and 808.57 Russell 2000.
- Fifteen of sixteen sectors are overvalued according to ValuEngine with only 37.7% of all stocks undervalued. At 35% the stock market tends to find a top. Only 17.5% of all stocks are undervalued by 20% or more.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.