Can the Market Keep the Momentum in 2011?

It is very difficult to predict future market directions.

You may be right on one or  two occasions but may be totally wrong on others.

But knowing future market direction is very important for anyone who wants to achieve above average investment returns as 80% of stocks follow the market movement. 

I made my own market direction on my January 3, 2010 Commentary to my members. Here is what I said in that Commentary:

 

Our View on Market Movement for the Year of 2010 - Jan 3, 2010

As we said that we are in the early stage of long term 5 year Bull run. 2009 is only the first year and we have four more years for the run. What the Bull run means is that we will see market makes consecutive yearly gains for the next four years.

What could happen for 2010? Of course we will not see the big runs which occurred in 2009. On the other hand we will not see big corrections during this year either. Our view is that we will see 10%-plus gains for all major market indexes for the year. For S&P 500, we will see 1,200 - 1,250 by the end of this year from current 1,115.10.

On the other hand, the S&P 500 will be in a box of 1,050 - 1,150 for the most of the year.

The S&P 500 closed at 1,257.64 on the last trading day in 2010, a gain of over 12%. And the S&P 500 did have spent most of the days traded in 1,050 - 1,150 range.

Here I would like to make another prediction for the year of 2011:

 

2011 will be the third year entering into its long term 5-year Bull run. We may see 1,400 - 1,500 by the end of 2011.
 

If we do see 1,500 by the end of this year, it is nothing worth to be excited.  Market reached 1,500 twice during the last 11 year span: first the year 2000, then the year 2007.  If market does reach 1,500 by the end of 2011, we can only say that market give us 0% return in last 11 years.

History has shown that  market may give us 10% annualized return on the long run. Sooner or later, S&P 500 will break 1,500.

Let us take a longer term view on the market:

S&P 500 had a very good runs in the 1990's. S&P500 made 11 yearly gains in a row from 1990 to 2000. It gained 38% in 1995-1996, 30% in 1997-198 and had an annualized gain of 15% for those 11 years.

Then followed a lost decade. As whole, the market made an annualized gain of about 6.15% from 1990 to 2010.

Another thing to notice is that market spent much more time on Bull run than on Bear attack. 

During last 21 years of market history, there were two Bear runs. The first lasted two and half years from September 2000 to March 2003 after ten years of Bull runs in the 1990's. The second lasted one and half years from October 2007 to March 2009 after 5 year Bull runs.

The third Bull run started from March 2009 and lasted less than two years so far. More to come, I believe.

What is the best investment during the Bull runs? We prefer stocks which hit very hard during recession but having good dividend history in their previous good years and is recovering now.

KFN is one of our key holdings.  We bought it 18 months ago at $1.30. The company used to pay $2.00 annual dividend and now pays $0.14 dividend per quarter ($0.56 annually). If we re-invest the dividend for another year, our buy price will be lowered to less than one dollar. After one more year we may get 100% annual dividend on our investment.  If you invested $100k on KFN in 2009, you may be receiving well over $100k dividend per year in later good years, enough for your retirement.

Many low priced REIT stocks may also be in this category. RAS is one of our current holdings and our first buy was at $1.00 last year. The company just announced its first annual dividend two week's ago. Its current price is $3.00, already 300% gain. Others are GKK, NCT, CT, MPG,  etc.

Companies with new technology will also benefit from US and world economy recovery. Alternative energy (DQ, SOL, WFR, SPWRA, FSLR, JASO, LDK, PEIX, EEE, etc), new chips (SSD stocks such as SNDK, STEC, MU, etc), APPL, new internet applications, etc will lead the gains. Key bank and financial stocks such as GS, JPM, BAC, C, BLK, WFC, MS, etc will also see better days ahead.

Investing into China is also a good bet. Of course, one needs to be very careful before putting money into any of China's ADRs. I will give my view on it later:

"Do and Don't when investing into China's ADR".

How about resource related stocks? Many resource related stocks had big runs last year such as gold miner stocks, oil stocks, rare earth related stocks. Many pulled back recently. I will give more on these later. Inflation will hit us as economy becomes hotter.  Keep this in mind. More on these laer.




Disclosure: I am long DQ, SOL, PEIX, KFN, RAS.