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The predictions are in and today begins the 2011 market year. I have read everything from the markets crashing to a 50% gain in equities this year. As with every year only time will tell and the key is to take what the market gives and be disciplined enough to capture the move up or down. The one word that summarizes all the discussions is optimism. In fact, that is the one word I would use to describe the year, optimism. The outlook is optimistic the economy will improve, jobs will grow and the overall global economic picture will be healthy.

With that in mind there are three sectors to watch as we begin the new year. First, small cap stocks (NYSEARCA:IJR), as the January effect revolves around small cap stocks. The statistics show January is the month that sets the tone for the sector. Thus, we should pay attention to the sector heading into the new year.

Technically the small cap stocks have been performing nicely already. In December, IJR was up 7% for the month. One would have to ask if the January effect came in December as the Santa rally came in early December versus the end of the month? I still like the outlook for the small cap stocks and for that matter mid-cap (NYSEARCA:IJH).

The chart below shows the pullback to support last Friday and the solid uptrend in play as we begin the new year:

(Click to enlarge)

Second is technology (NYSEARCA:XLK), and the outlook for the sector remains one of my top picks in the new year. This is one sector we have to break down and look at the parts as well as the whole. Semiconductors (IGW) has been the primary leader and looks solid as we start the year. I expect the leadership to come for the internet and the mobilization of information to individuals through devices such as the iPad (NASDAQ:AAPL) and PDA phones.

First Trust DJ Internet ETF (NYSEARCA:FDN) is one way to play this basket of stocks or you can dig through the ETF to find the winners. In this space Google (NASDAQ:GOOG) is one to watch as they expand and become more aggressive in capturing market share. Software (NYSEARCA:IGV) is an additional subsector to watch in the technology space as well.

The chart below shows consolidation above the $34 level. Watch for continuation of the uptrend already in play and a break above the $35.30 resistance:

(Click to enlarge)

Third is financials (NYSEARCA:XLF), which started to rally in December, providing some much needed leadership for the broad markets. The outlook has improved on the premise short term they are borrowing money at zero percent interest from the Federal Reserve and if they invest in Treasury bonds getting a 4% return with virtually no risk.

However, if the rally is to continue look for lending to increase and balance sheets to get cleaned up as the year progresses. This will be a volatile recovery process for the sector overall as the headlines will remain full of speculation surrounding regulations and mortgage defaults. Three driving components will be M&A activity, stock buyback programs and the return of dividends.

The chart below shows the break above $15 and the short term uptrend in play. There is some consolidation near the $16 level currently and I look for that to break higher. Banks (NYSEARCA:KBE) could be the leading subsector to push the overall sector higher.

(Click to enlarge)

As we begin the new year stay focused on your goals and practice discipline when it comes to managing your money.

Disclosure: No positions

Source: 3 ETFs to Watch