The last part of 2010 and these first days of 2011 have been exciting indeed. It almost doesn’t matter what is in your portfolio: the best bet is it performed handsomely during the last few weeks. The big question now is: where to from here?
I am very optimistic about 2011 prospects. There are solid signs of economic stabilization, and most importantly, consumers got tired of the economic doom and gloom, as demonstrated by the rosy December retail figures. This is key: economy is, above all, a psychological phenomenon. If enough people believe things will be OK, then things will be OK.
On the other hand, though, I don’t see the stock market reaching an all-time high in 2011. The wounds of the very recent collapse are still fresh, and investors, both individuals and institutions, will thread lightly. The action in 2011 will be characterized by the over-used but very real concept of “cautious optimism”. What does that mean in practical terms? High volatility. Investors will get spooked with every hint of bad news, and will shoot –read ‘sell’- first and ask question later. Once the bad news are assessed as not that threatening, they’ll quickly come back with a vengeance. Also, frequent profit-taking will add to the choppiness I foresee. So, what are my assumed implications of this behavior for a sound investment strategy for 2011?:
- On October 9, 2007, the Dow reached its all-time high of 14,164. Today, the Dow is hovering above 11,730. That’s barely 2,400 points or 20% of its all-time peak. If we assume we can reasonably cover half the distance this year, that puts the Dow closing 2011 at around 12,900. In a straight-line, that would mean a gain of more or less 100 points a month from now to year end. But of course it won’t be that easy. Because of the circumstances I mentioned, I think that we will have three or four short-lived corrections of around 5% each, the first of which is likely around the corner. I don’t believe we will finish January without seeing a drop in the market indicators. But these will all be buyable dips, and very much indispensable to achieve a decent return in 2011.
- I see two sectors as the real winners in 2011: Financial Services and Technology. Financials are still laggards in the recovery experimented in 2009-2010. With improved economic prospects, investors will rush to take positions in the biggest names in the sector. With regard to Technology, just two words: iPhone and Android. This is what Jim Cramer is qualifying as the “Internet Tsunami”, and on this one, I have to agree with him. Other sectors to benefit? Retail, Energy, Industrials and Commodities.
Of course, talking about sectors is just the beginning. Which individual stocks will be the big winners? I’ll share my ideas in the following posts.