3 Major Stock Trends for 2012... and How to Profit

Three major trends developing right now will greatly influence equities in 2012. Yet despite an immensely difficult trading environment — compounded by the seemingly never-ending eurozone debacle — several important forces are at play setting up specific investing and trading opportunities for the new year.

Here’s what you’ll need to know to stay on top of your game as the new calendar year approaches:

1. Pharma stocks are set to outperform the market —

When it comes to prescription medications, Plavix, Symbicort and Viagra are three household names that have generated massive revenues during their respective lifetimes. And even though these three medications treat very different ailments, they do all have one important thing in common: Each of these drugs’ patents is set to expire within the next two years.

These aren’t the only big-name drugs that could give way to cheap generics. By 2016, patents are set to expire for many of the best-selling drugs on the market, totaling $255 billion in annual sales, according to EvaluatePharma Ltd., a London research firm. Now numerous generic makers are preparing drug applications for what should be an influx of new, cheaper drugs to the market.

It’s not just the generic drug makers that are looking to post significant gains in Well-positioned pharmaceutical giants are already showing incredible strength. In fact, Eli Lilly & Co. (NYSE: LLY) is posted new 52-week highs this morning, capping off a strong December run.

2. Technology stocks are faltering —

Semiconductors were a strong performer for most of 2011. However, the tide appears to be turning for these tech stocks. The Dow Jones US Semiconductor Index flexed its muscles through November, yet failed to top its October highs. What resulted was a double-top, then lower highs after the post-Thanksgiving rally:

Semiconductors are performing poorly relative to the market at large — and they aren’t the only tech stocks that have hit a wall. Poor earnings this week from Oracle Corp. (NASDAQ: ORCL) and the stock’s subsequent drop highlight how fragile the entire sector has become. It would be wise to avoid tech names for the time being — I do not see these stocks bouncing back anytime soon…

3. A consumer comeback will propel new market leaders —

Under the surface, unemployment statistics are showing strong improvements. New claims for unemployment benefits dropped to the lowest we’ve seen in more than three and a half years last week. If this trend continues (or accelerates), it will be a help to restart a stalled economy. “The drop in firings in the U.S. may be helping boost confidence. The Bloomberg comfort index rose last week to the highest level in five months as all three components — state of the economy, buying climate and personal finances — improved,” according to Bloomberg.

This should also help reinvigorate consumer spending, helping to push top retail stocks to new highs. We’re already seeing stocks like Wal-Mart Stores Inc. (NYSE: WMT) and The Home Depot Inc.

(NYSE: HD) lead the market this month with strong uptrends. There is a strong possibility that these names continue to post new highs in the coming weeks and months.

Jay Taylor: Turning Hard Times Into Good Times

12/27/2011: Protecting Yourself against the Creature from Jekyll Island

The Secret to Making Money Trading in 2012... and Beyond

Statistically, trading may be one of the most difficult ways to make money. In fact, it's estimated that up to 90% of traders lose money. That's a shame, since there are several simple trading systems that trounce the market.

Unfortunately, not all traders are ready to take advantage of winning trading systems. They require patience.

Major trends, the type that create real wealth, take time to develop. Traders that get caught up in the day-to-day market volatility miss the biggest market moves. Some of the best trading systems in world help traders ignore market noise while gains build up in their account.

The ten-month moving average trading system, for example, has consistently beaten the market and reduces risk over the long term. This simple trading strategy is long when the closing price of the market, or any security, is above the 10-month moving average and in cash whenever prices close below the average. If we apply a 10-month moving average to the S&P 500 Index since 1961, this easy to follow system beats buy-and-hold while reducing risk.

Risk is reduced by getting out of the market before major bear markets take back bull market profits. As the market turns down, prices fall below the 10-month moving average and trigger a sell signal. Impatient investors looking for an edge might try a 10-week or even a 10-day moving average to get "buy" and "sell" signals before other traders. That's a mistake. Test results show that the shorter moving averages actually reduce profits and increase risk over the 50-year test period:

Profits come from the big trends and weekly or daily moving averages give too many false signals. Prices often move quickly above and below short-term moving average, generating a series of small trades. These small trades are known as whipsaw trades, and they destroy returns. Trading with monthly moving averages reduces whipsaw trades and delivers bigger gains.

The chart below shows the difference in trading activity between the 10-day and 10-month moving average during the past 6 months. Trades are taken each time prices cross through the moving average.

During the past 6 months, the S&P 500 is down about -6%. Trading the 10-day moving average would have lead to 16 trades for a loss of about -8% -- worse than just holding the S&P 500. The 10-month moving average would have generated only two trades, for a small loss of less than 1%.

This simple observation led me to discover my own long-term profit machine - the 6-month rate of change (ROC) system. My system signals me to buy the best performing assets from the past six months. In the long-term, my system works very well -- it has delivered an average annual return of +14.9% since January 2007. The S&P 500 is barely breakeven in the same time period.

Trying to gain an edge by using a shorter term rate of change trading systems eats away profits. A 13-week ROC system, for example, would have lost -3% a year, a drastic drop from +14.9% annual returns with a 6-month ROC system. The reality is long-term winners are more reliable performers than short-term high fliers.

Right now, my system is signaling for traders to be patient. It's still holding three bond ETFs -- iShares Lehman 7-10 Year Treasury (IEF), iShares Barclays 20+ Year Treasury Bonds (TLT), and iShares iBoxx Investment Grade Corporate Bonds (LQD). These "boring" bond funds have significantly outperformed the market during the past six months. TLT is up more than 20%, IEF is up 9% and LQD has gained 2%.

The S&P 500 is down about -6%.

As I mentioned last week, my trading system has a great track-record trading bonds. So I have no problem holding bonds until my system says it's time to buy riskier assets. I recommend traders looking for big, long-term gains also be patient.

Economic Outlook Winter 2012: National Bank of Canada

• It has been a difficult year for the global economy. We see continuing deceleration in 2012. The crisis of public finances in the euro zone has undercut the economy of the region: the fiscal austerity forced on virtually all of its governments has madea recession practically inevitable. Despite an anticipated rebound in the U.S., the advanced economies as a group are likely to grow less in 2012 than in any of the last 30 years outside the recent recession. The emerging economies, however, with their ever-growingweight in the world, can be expected to pull global growth to 3.4% in 2012.

• It is now clear that the U.S. economy not just avoided recession in 2011 but in fact accelerated as the year progressed. GDP in Q4 is tracking well above 2% annualized, the best quarterly performance of 2011. Momentum should carry through to 2012, withthe U.S. achieving above-potential growth for the first time in six years, helped by resilient domestic demand and inventory rebuilding. The big caveat, however, is that a European-triggered global financial crisis is averted by policymakers who would, presumably,have learnt about the devastating costs of inaction à la 2008.

• Facing challenges both at home and abroad in 2012, Canada stands to underperform the U.S. for the first time in six years. Domestic demand will be under siege from a likely softening in housing, and a more moderate pace to consumption spending. Tradewill be vulnerable to the lagged impacts of a strong Canadian dollar although there will be some offset in the form of increasing demand from an accelerating U.S. economy. With domestic demand treading water and European inertia threatening to trigger a globalfinancial crisis, the Bank of Canada is likely to delay interest rate hikes to 2013.

• In all provinces, economic growth in 2012 will feel the effects of declining government fixed investment and budget austerity. Growth will exceed the national average in each of the Western provinces, since natural resource development will not be impairedby the darkening of the global outlook. Conversely, growth will be sub-par in each of the Atlantic Provinces and in Ontario and Quebec.

• Download the full report

India Slows Rush for Gold

It appears even Indian demand for gold falls under the age old supply/demand dynamic of Economics 101. Despite a cultural affinity for the yellow metal, sky high prices are finally having a real impact on end demand. The WSJ takes a look:

• Many Indians are either scaling back or eliminating their gold purchases outright. The drop-off in demand is exposing cracks in what gold investors have traditionally perceived as a solid support for global prices. With many of its religious and cultural traditions steeped in the precious metal, India historically has been the world’s biggest consumer of gold, much of it cast into jewelry. Gold plays a particularly important role in wedding ceremonies, and physical demand for gold usually rises significantly in the fall and winter, which are considered auspicious times for getting married.
• This year, however, the wedding season dovetailed with a rapid depreciation of the rupee against the dollar as investors fled India amid jitters about the broader economy. India’s imports of gold fell to 20 million metric tons in November, down as much as 75% from a year earlier, according to estimates from the Bombay Bullion Association, an industry group for the country’s gold dealers.
• Many investors and analysts believe that is a key reason why gold prices haven’t bounced back even though concerns about Europe’s debt load and the viability of euro persist.
• Roughly a third of global demand for gold in the form of jewelry, or 649.9 metric tons, came from India in the year ended Sept. 30, according to the World Gold Council. Ornate necklaces, armlets, earrings, bangles, gold chains and finger rings are an essential part of a Hindu bride’s trousseau and are usually bought by her parents.

Chart of the Day - Genuine Parts (GPC)

The "Chart of the Day" is Genuine Parts (GPC), which showed up on Friday's Barchart "All Time High" list. Genuine Parts on Friday posted a new all-time high of $61.65 and closed up 1.77%. TrendSpotter has been Long since Dec 2 at $59.52. In recent news on the stock, Genuine Parts on Oct 18 reported Q3 EPS of 97 cents versus the consensus of 94 cents. Management said it sees gradual gross margin improvement in fiscal year 2012. Genuine Parts Company, with a market cap of $9.3 billion, is a distributor of automotive replacement parts in the U.S., Canada and Mexico.

Martin Armstrong: The Coming Financial Border Controls

The Coming Financial Border Controls

It's Berlin All Over Again


click here to read pdf

BB&T Is a Top Banking Buy for 2012

BB&T Corp. (NYSE:BBT) — Although it’s ranked the eighth largest U.S. bank by assets and 1,750 operating branches, BB&T is considered a regional bank. It operates mostly in the southeast United States, and has managed to remain profitable despite the turmoil in the banking system.

In 2009, the company earned $1.15, down from $2.71 in 2008. But it earned $1.16 in 2010, and is expected to earn $1.84 in 2011. And S&P expects BB&T to earn $2.60 in 2012.

Technically BB&T is in a bullish channel that is approaching its bearish resistance line. It has already made significant progress against overwhelming resistance, and last week even broke through the top of its bullish channel. Thus, momentum could push this stock through the major resistance at just over $26 with a target in the mid-$30s by March.

The company pays a dividend of 64 cents for a 2.51% yield and has a history of increases.

Funny Pic

Case Shiller: Home Prices Fell 3.4% Year-over-Year

U.S. home prices fell ~1.2% respectively in October versus September, with 19 of 20 cities covered by the indices decreasing over the month. Year over year drops of the 10- and 20-City Composites fell -3.0% and -3.4% respectively versus October 2010.

As of October 2011, average home prices across the U.S. are back to their mid-2003 levels. (See chart below) Measured from their June/July 2006 peaks, the peak-to-current declines for the 10-City Composite & 20-City Composite are -31.9% and -32.1%, respectively.

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click for larger chart

Source: S&P Case Shiller

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More charts after the jump

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Year over Year Percentage Price Change in Case Shiller Home Price Index

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20 Metropolitan Region Monthly changes

Spanish Implosion Coming Up

Mike 'Mish' Shedlock

My friend Bran from Spain sent a pair of articles in Spanish that highlight the impossible situation facing Spain. The links below have a target of Google Translations.

Need to Cut 40 Billion Euros from 90 Billion

Spain needs to cut 40 billion euros from its budget to meet its deficit target for 2012. The problem is there is only 90 billion of expenses to 'play with' according to an article in Libre Mercado: The maze of Montoro: save 40,000 million without "social cuts"

To reach the deficit target agreed with Brussels, the new finance minister will have to come to his office with scissors ready.

The key figure is 4.4%. This is the deficit target committed to the EU by 2012. Would overcome a difficult situation in Spain, both to their partners as compared to international investors. In theory, 2011 will end with a deficit of 6% (so say government forecasts), this would leave a hole of 16,500 million for the coming year.

The problem is that almost no one believes any longer in these figures. Funcas predictions published yesterday, which included a deficit of 8% this year. With this figure, the gap would be closed would be about 40,000 million.

To climb this column, Treasury can raise taxes or trust fund to increase the current rates. The first has been ruled out by [Prime Minister] Rajoy, at least in the short term.

The following graph shows the distribution of state revenues by item. As seen, the vast majority, almost 70% comes from direct taxes and social contributions (income tax and companies mainly). Obviously, these items depend very much on the economic activity, any slowdown could even make predictions of the Government go down, which would make the situation even more complicated.



With this background, most of the adjustment will have to come, necessarily, on the expenditure side. At his inauguration, Montoro says he will not come to the Treasury to "make cuts, but to make reforms."

65% of spending is directed to pay the debt, the Ministry of Labour and Social Security (pensions).

The rest (35%) will have to come almost all the adjustment. This is a 91,000 million euros. Imagine the magnitude of the task.

Mission Impossible

The article says debt, pensions, and unemployment are not touchable. Also, Prime Minister Rajoy has ruled out tax hikes (for the short-term) whatever that means.

The entire setup is mathematical nonsense. Should the prime minister resort to tax hikes, it will plunge Spain even deeper into recession.

Spanish unemployment is already 22.8%.

Spain's Hidden Deficit

A second article discusses Spain's Hidden Deficit

One of the foremost experts on national circumstances says "Rajoy has no room to bring out all the hidden deficit and will not." Their main argument is the experience of what happened in Greece, where Papandreou, just come to power deficit brought to light hidden by the previous government and that is the source of the recent seizures in the debt market.

The challenges for 2011 will close with a deficit equivalent to 6% of GDP today seem to me almost insurmountable. Especially considering the revenue performance.

The data announced yesterday by the Tax Office indicated, namely that fiscal consolidation measures have saved up to 8.167 million in November, including the reduction in the VAT rate to 4% on the purchase of new housing, at a cost to the exchequer audience estimated at 115 million euros.

According to the Tax Agency , the comparison between the total amount of regulatory impacts and increased revenues accumulating to November (761 million) it follows that in the absence thereof, the tax revenues would decline recorded in 2011 around -4%, "in line with the fall of the aggregate tax base of taxes in the first three quarters."

This drop in real income-without 'extraordinarios'-explains the suspicion that the real deficit will grow as and when the accounts of the autonomous communities, municipalities and social security itself, which will close this year with a deficit, when expected a surplus of four tenths of GDP, about 4,000 million euros. Especially considering that during the second half of the year the economy has performed worse than the first. And in this context, appear with a deficit of 7% or 8% before the markets seems to be a problem for the new government.

The simple translation is Spain's budget deficit is bigger than they say and revenues are expected to drop next year by 4%.

Bran writes ... "This article tells us that the new government cannot afford to bring out all the debt into the open because when Greece did so, the markets abandoned the country. For each 1% the deficit is off target, another 10 billion must be cut from 2012. People are placing the deficit for 2011 at 7 or 8% as opposed to the planned 6%. FUNCAS gave the 40 billion cut needed mentioned above based on 8% deficit this year."

The Prime Minister apparently thinks if he does not admit the debt and the worsening deficit, the market will ignore the problem. We will soon find out for how long.

Mike "Mish" Shedlock