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Chaikin Market Commentary 02/03/2012

Chaikin Market Commentary 2/03/2012

The S&P 500 is up slightly for the week as of Thursday's close of 1325.54. Not much has changed over the past two weeks. The market holds above the 1300 psychological support level and it closed the month of January up 4.32%. Pullbacks have been minimal, surprising the bears and the cautious bulls alike…put me in the cautious bull camp.

This strong January performance plus the tailwinds normally provided in a presidential election year, with an incumbent running for re-election, point towards a stock market in 2012 with an upward bias.

Based on historical averages we could see the S&P 500 gain an additional 11% and reach the 1450 level.

The Problem with history is…

History is just a guide, albeit one that we ignore at our own peril. The challenge for investors in the current economic and political climate is that managing your portfolio in a volatile market with uncertain economic and fiscal outcomes requires discipline.

That is why we have stressed two simple rules to guide you:

1) Play Defense by eliminating stocks from your portfolio with a bearish Chaikin Power Gauge Rating. This avoids the unpleasant overnight surprise when a stock like Amazon reports disappointing earnings and drops 20 points before you can even consider getting out and cutting your loss.

On the flip side you sometimes miss out on the gains from a Green Mountain Coffee which had a bearish Power Gauge Rating from 90 down to 34, but has now rallied to 66 on a positive earnings surprise. That's the point, really. Stocks which have a bearish rating are more likely to disappoint and blow up your portfolio returns.

Why take the risk?

Buy Stocks with Bullish Chaikin Power Gauge Ratings instead. Occasionally you will wake up to a pleasant surprise like Apple Inc. opening up 34 points after far exceeding analyst's estimates. A different type of advance came from Gilead Sciences which we featured in our blog posts in late November. GILD had a bullish Power Gauge rating amidst uncertainty about its planned purchase of Pharmasset. The stock has gone up 30% in a straight line over the past 6 weeks.

2) Buy Stocks with Bullish Potential on short-term Pullbacks. Stocks with very bullish potential have clearly led the charge as the stock market has defied conventional expectations and grinded its way higher over the past 4 months.

This Coming Week…

As I write this the stock index futures are reacting very positively to the jobs report which shows that the U.S. economy created 243,000 jobs in January as the unemployment rate dropped to 8.3%. With the Euro Zone economies in shambles and China a question mark, the U.S. stock market is going to continue to see a flood of liquidity from international investors.

With stocks under owned by both institutional and individual investors, the likelihood of seeing the historical pattern of higher prices in a presidential election year looks very high.

This is another example of the value, indeed the necessity of ignoring the headlines and the pundits, who have been routinely bearish on both the U.S. economy and the stock market.

There is an old saying on the floor of the New York Stock Exchange; Make money, not predictions!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.