After two straight holiday-shortened weeks, we finally get to see what a full market week will bring us. At the moment, I am about 60% invested. My bias this week is Bearish, This means I will try to get 100% invested with about 60% of the portfolio positioned to do well in a bearish market and 40% positioned to at least generate income from the sale of premium in a bullish market.
You may ask, “If you are bearish, why not be 100% bearish? Why only 60% bearish?”
As I have mentioned before, but will repeat often, I suspect that 2012 will see a market that is not that dissimilar to 2011. It could actually be more pronounced in the number of significant market swings. The reason I believe this is rather simple: Nothing has changed. We did not see an end to the financial crises in Europe. Indeed, we didn’t see the beginning of the end. We did not see a reduction of hostilities in the Middle East. One could argue that the situation has gotten more exacerbated, not less. The US has not gotten control of its ever increasing national debt. The housing crisis has not gone away.
Unemployment in the US continues to be at significantly unacceptable levels. The US banks are still not lending to small businesses. Regulatory constraints continue to limit growth of business. There could be some significant positives this year with a Presidential election in the mix. If history bears out, there will be no small amount of attempts by the White House and Congress to do everything possible to spur economic growth. But, without some significant change or resolution of some of these issues, there is little that I see that will create a less volatile and a more predictable market.
Our longer-range forecast models indicate the market could move lower than the lowest move we saw in 2011 and we may see moves higher in 2012 than we have seen in several years. I suspect that 2012 will be far from steady-state.
Therefore, my strategy for 2012 is to focus on “selling premium”. With this strategy, I will be looking for trades that will allow me to hold longer-term positions that are bull-biased and bear-biased, with a slight edge given to one direction or the other depending upon the bullishness or bearishness of the forecasts at the time. I will be selling near-term (upcoming week or upcoming month) call options against these positions to do two things: 1) Reduce the basis in the underlying holding; and, 2) Generate income.
Although I will strive to stay 100% invested this year, there will be times when I will not have an equity to fill an open position, which will necessitate holding some cash from time-to-time.
A Bear-Biased Case…
My analysis of the major US indexes results in a bear bias, with the S&P 500 and the DJIA giving the clearest picture of a sell-off this coming week. The Nasdaq, in comparison, does not start its forecast move lower until about the 19th of January. Previously, the Nasdaq forecast was showing a sell-off to begin this coming week, but the updated algorithms and forecast push this sell-off out another week. But, with the S&P and the DJIA both showing strong downward forecasts, the prudent action is to lean more toward a bearish stance.
Several of the currency forecasts also support a weakening US market. The US Dollar looks to strengthen against the Euro, the Aussie Dollar, the Yen, the Canadian Dollar and the Swiss Franc over the next few weeks. A strengthening Dollar often puts pressure on US markets.
Gold looks to weaken some this coming week, but looks particularly weak in the out weeks, where the forecast for gold indicates it could move all the way back to the $1350 level.
Bonds look to strengthen over the next 90 days.
Of the major Sectors, only Technology looks attractive from a bull-biased perspective. With nearly all of the other Sectors showing a weakening trend, longer term, I would be careful putting too much long money to work right now unless you are utilizing a ‘sell premium’ strategy similar to the one I am following.
Forecasting is not a science and although our mathematical models do an excellent job of forecasting, these models are NOT a crystal ball. I do find that when I look at the models as a mosaic and not series of rifle shots, I tend to get a very good picture of where the market is likely headed.
With that in mind, as stated above… I am 60/40 bear-biased.