7 Reasons To Stay Cautiously Bullish On The Markets

Includes: DIA, QQQ, SPY
by: Efsinvestment

2011 was a truly disastrous year for global markets, mostly born of the eurozone crisis, the U.S. unemployment rate and lack of liquidity. Europe was at a dead-end, Europeans were trying to hold their ground and survive with minimum harm. Like many contributors, I recommended avoiding risk at all costs, and heading for the safe havens. Dividend aristocrats did remarkably well as I have thought, sheltering your savings very well and even letting you make profits amidst the crisis.

As far as it seems, the dust has settled in Europe and the world. 2012 had the best start for markets since 1994, and the pessimistic atmosphere of 2011 no longer exists. I still suggest that you devote some money for successful dividend payers. However, it is time to make large profits as the markets are on track again. Listed below are reasons why I believe that 2012 will be a much better year than 2011, for Europe and the world.

  • Investors are searching for more risk, which leads to a healthy recovery in the overall markets. As people filled their portfolios with dividend stocks in the crisis, now these stocks are extremely overbought. Now that there's more appetite for risk, dividend stocks are starting to lose favor. That's exactly why I kept warning you about the overbought dividend stocks here, and here. Even McDonald's (NYSE:MCD) might need to rest a bit. Like Michael Bapis of HighTower Advisors says:

There's more of an appetite for risk. People were so conservative last year. Now there's an appetite for risk, so it's not as sexy to be in dividend stocks.

  • Europe is in much, much better shape. Greece is to receive a $170 billion bailout, which is likely to be negotiated by the end of this week. People started to believe that the euro and Europe can survive, and even avoid recession. Mark Mobius of Templeton Emerging Markets Group was recently in Romania and Austria, stating that there's already a recovery in process:

Reforms are taking place now in Europe, the effects will kick in next year, and then you're going to see a much stronger regional community. The increased confidence over Europe and greater liquidity would help emerging market stocks post a strong recovery in 2012.

The problem in Europe was that everyone was blaming everyone, refusing to pay debts of a nation that kept having siestas. The locomotive of the Union, Germany, was very reluctant to rescue Greece. Kicking Greece out of the club was on the table throughout the crisis, but they knew it would have done more harm. Now that everyone agreed on helping Greece for the second time, Europe started seeing progress.

  • The U.S. unemployment rate dropped to 8.3%, topping estimates and leading to a rally in U.S. stock- index futures. This rate is the lowest since February 2009. Now that the unemployment rate is domesticated, the U.S. stocks will get the most benefit out of it. There will be indirect, but very sensible effects of this to European markets, as well.
  • Less IPOs are expected this year. Like Mobius states, there were too many initial public offerings during previous years, which took more than half a trillion dollars out of the secondary markets. Therefore, emerging markets were at a great impasse. The most important IPO of 2012 will be Facebook's (NASDAQ:FB), whose shares will be offered soon. As the offerings are likely to be lower this year, emerging markets can easily mend themselves.
  • Standard & Poors has just spotted a Golden Cross. The Golden Cross, opposite of the Death Cross, appears when the 50-day moving average crosses above the 200-day moving average. This cross is widely considered as a long-term bullish signal. As Kevin Pleines of Birinyi Associates stated, there have been 26 Golden Crosses since 1962, most of which led the market to higher levels after six months. The Standard & Poors Index is already having its longest weekly rally in a year.
  • Dow Jones Industrial Average is at its highest since May 2008. Dow Jones closed the week at 12.862. If it can stay above this level, more funds will flood into equity markets. Given the paltry returns of bond markets, the risk-on factor will divert large funds to switch from bonds to equity markets.
  • Apple (NASDAQ:AAPL) reported its best quarter ever. Its reported earnings per share was almost 40% higher than consensus estimates. Analysts have a tendency to be over optimistic. If a company like Apple-- which has a very transparent balance sheet-- can beat analyst estimates, other tech companies are likely to follow.

I know that the recovery in Europe is still too fragile, but there's absolutely much more confidence and liquidity now-- which is the key to avoid another '11. If European leaders cooperate using common sense, they can pull themselves out of this storm easily. I see no big handicap in Europe's way if they act rationally. United States is clearly safer and more stable for investors this year. I am willing to take more risks and hope for larger profits, as the markets are back on track. However, there's always some good in staying a bit cautious.

Disclosure: I am long AAPL.