TomAspray's  Instablog

The year has started off well, but some sectors and strategies have the potential to pay off even better in coming weeks. MoneyShow.com senior editor Tom Aspray explains.

The first week of the New Year has certainly been a good one for the stock market, as the S&P 500 finished the week up 1.3% and the Dow Industrials gained 1.1%. This was in contrast to the 3.4% gain in the Nasdaq-100.

There was little in the way of bad news from the Eurozone (for a change), though yields on many of the euro bonds are still at dangerously high levels. Upcoming bond auctions in Euro land will be watched closely.

The inflation rate in the Eurozone declined in December—which is a plus—and the markets are not expecting another rate cut next week by the ECB. The seasonal pattern is for the euro to decline in January, and technically it looks quite weak. The next major support is at $1.20, which is 5.5% below current levels.

The economic news started the week off strong as the ISM Manufacturing Index signaled acceleration in the manufacturing sector. By the time the report was released last Tuesday, the Dow was already up more than 200 points. Tuesday’s reading on November construction spending was double what the market was expecting.

 
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The ADP Employment report Thursday and declining unemployment claims also buoyed the stock market, and the good news culminated with monthly jobs report, which was also much better than expected. The chart shows marked improvement from the lows in May and June 2011, but this is likely to give little solace to the unemployed.

So what does this mean for stock prices? Though my intermediate outlook remains positive, a decisive close above the October highs on increasing volume is still needed to give significantly higher upside targets.

The Wall Street Journal did their annual survey of 13 Wall Street strategists, who on average are looking for a 6.1% gain in the S&P 500 in 2012. That would put the S&P 500 at 1,334 at the end of the year.

Last year, the consensus was for an 8.3% gain, but even the closest forecast was still 3.3% too high. For 2012 there is a wide range, with a high of 1,500 (a 19.2% gain) and a low estimate of 1,190 (a 5.4% loss).

Forecasting a year in advance is quite tough. Even though I have been bullish since September, my cracked crystal ball doesn’t do yearly forecasts. I think 2012 will be better than 2011, especially if you concentrate on the strongest sectors and are willing to switch when new sectors take over leadership.

A dominant concern as we enter the New Year is the health of the Chinese economy. Too-high real estate prices continue to slow the country's economic growth. The Shanghai Composite is still in a clear downtrend after breaking monthly support last June.

Very few of the other overseas markets were higher in 2011, but I think that may change in 2012.

This week has a light economic calendar. Retail sales and jobless claims come out on Thursday. Then on Friday, we get the latest on imports and exports from the International Trade report and the University of Michigan’s Consumer Sentiment survey.

WHAT TO WATCH 
The surge in stock prices early in the week was impressive, and the failure to add to those gains at the end of the week is not yet a concern. Bullish sentiment has jumped, which suggests that the market may be vulnerable over the next few weeks.

The AAII sentiment reached 48.4% bullish, which is the highest reading since last February 10. The number of bullish newsletter writers is at 49.5%, down from 50.5% the prior week. Neither reading is close to levels that are normally associated with major tops. (In early October, newsletter writer sentiment reached levels that were consistent with a significant market low.)

Typically, we do see a pullback in the latter part of January, which suggests that we could get a better buying opportunity in the next several weeks. Certainly, we would only be buying on pullbacks

 
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S&P 500
The Spyder Trust (SPY) reversed nicely to the upside from the December 19 lows and closed last week above its flat 200-day MA. The 50-day is still below the 200-day, so no “golden cross" has yet formed.

The downtrend from the June highs at $125.70 (line a) was also overcome. The next resistance stands at $129.42, which was the October high. If it is surpassed, the 127.2% Fibonacci target is just above $133.

The NYSE Advance/Decline line is acting stronger than prices, as it has moved through both the July and November highs (line c). The long-term uptrend in the A/D line that goes back to early 2010 was violated in September and early October, but the very high bearish sentiment at the time suggested it was not a major sell signal.

There is initial support now at $124.80 to $126.50, with the uptrend (line b) now at $122.40.

Dow Industrials
The weekly chart of the Spyder Diamonds Trust (DIA) shows that it has just reached converging resistance. That is the downtrend from last summer’s highs (line e) as well as the neckline for the head-and-shoulders top (line f).

There is additional resistance at $127.37, and then at the April highs of $128.63.

The weekly relative performance, or RS analysis, bottomed early in 2011 when it moved above its WMA and surpassed the prior peak. It had dropped below the WMA several times during the year, but has maintained its pattern of higher highs and higher lows. Good support can be found now at the uptrend (line g).

The weekly on-balance volume (OBV) moved through its downtrend (line h) in October, but has made little upside progress since. Its WMA is rising, which is a positive sign, so a pullback to the WMA should be a good buying opportunity.

There is first support now at $122.56, with more important levels at $120.60. The key short-term support now sits at $117.

 
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Nasdaq-100
The PowerShares QQQ Trust (QQQ) was one of the strongest averages last week, gapping through its short-term downtrend (line b). The next strong resistance, which connects the July and October highs, is at $58.90. A strong close above this level would be very positive.

The daily RS analysis started a short term downtrend on October 20 (see arrow) and this downtrend (line d) has now been broken. The RS has also moved above its WMA, suggesting it has started to outperform the S&P 500.

The daily OBV has broken its downtrend (line e), and has moved well above its WMA. The weekly OBV (not shown) is also positive.
 
QQQ has initial support now at $58.80 to $57.20, with much stronger levels at $55.60 to $56.40. The daily uptrend (line c) follows at $54.90.

Russell 2000
The iShares Russell 2000 Index Fund (IWM) was higher last week, but so far the action has been disappointing. It looks more likely that we will not see the January Effect this year...though this doesn't mean there won’t be opportunities in small-cap stocks.

Last week’s close was still below the resistance at $75.39, with the major 61.8% Fibonacci retracement resistance waiting in the $77 area (line f).

The weekly RS line has been declining for the past four weeks, as IWM has been weaker than the SPY. A break of the uptrend (line i) would be negative. The RS needs to move through the resistance (line h) to suggest that small caps are starting to outperform.

There is initial support at $73.27, with the uptrend (line g) now at $71.58. The November 25 lows sit at $66.62.

Sector Focus 
The iShares Dow Jones Transportation ETF (IYT) is still outperforming the S&P, and a strong close above $94.70 would be very positive. Initial support now sits at $88, with much stronger levels at $85.50 to $86.50.

In Friday’s in-depth report “Sector Selection Is the Key for 2012,” I reviewed the performance of the key sectors in 2011 and shared the current outlook. I think that sector selection will be just as important in 2012 as it was in 2011, and is likely to be the key as to whether your stock investing in 2012 is profitable.

The Select Sector SPDR Industrials (XLI) looks the most promising for new positions.

 
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Oil
The April crude oil contract pushed to new rally highs this week at $104.10, surpassing the prior high at $103.30 (line a). Prices are locked right in the middle of their Starc bands.

Volume was fairly heavy on the decline in the middle of December, and the weekly OBV dropped below its WMA and tested support (line c). The OBV is now once again above its WMA.

There is major weekly chart support well below the market (line b) at $93.30.

Precious Metals
SPDR Gold Trust (GLD) came within a few cents of my recommended buying zone before rallying $10. The rally suggests we are now closer to a bottom, though we still could see one more drop below the recent lows at $148.27 before a bottom is completed.

The daily flag formation (lines e and f) is a continuation pattern that should be resolved to the upside in the next month or so. The next resistance stand at $163.50, with further levels at $166. A strong close above this level would complete the flag formation, with upside Fibonacci targets at $193.

The daily OBV is just barely above its WMA, and has not yet formed any positive divergences, as it has formed lower lows (line h). A break in the OBV’s downtrend (line g) would be very positive.

GLD has short-term support now at $154, and then in the $150 to $152 area.

The iShares Silver Trust (SLV) is still acting much weaker, as it recently dropped below the January 2011 lows. Once gold really turns, it should follow, but there are no signs yet that a low is in place.

The Week Ahead 
The year-end performance in the stock market was enough to bring the S&P 500 back to the break-even level. This is in contrast to the 5.3% gain in the SPDR Diamonds Trust (DIA).

The large-cap industrials stocks should continue to do well, and my monthly Starc band analysis of the Dow stocks has been effective in picking stocks that have outperformed the market. Especially for those who have little invested in the stock market, this is a good place to start, as many have very attractive dividends along with good growth potential.

There should also be some good trends in the various sectors, but they may only last two to four months. Buying individual stocks in these outperforming sectors will have the most potential reward, but also a higher risk than the ETFs. Before you buy, be sure to determine your stop placement, and therefore your potential risk.

Lastly, for those who are not in gold or want to add to their position in an ETF like the SPDR Gold Trust(GLD), we should get a good opportunity in the next month or so.

Don’t miss Tom’s latest Trading Lesson: Buy, Sell, or Wait: A Way to Decide