Pic of the Day

Google Ready to Go to $700

Google (NASDAQ:GOOG) — In the Dec. 7 Trade of the Day I said, “The world’s largest Internet company may see an increase in revenues in 2012, but a decrease in net profits is likely due to costs from recent acquisitions and a slowing world economy.

“On the long-term weekly charts, GOOG has been in a rectangle for over four years without a successful breakout… holders should take protective steps to limit losses by selling calls or buying puts on the stock.”

I must now cancel that recommendation since GOOG has finally broken from a dramatic “W” formation with a target of $700. Cover all shorts and bearish positions and buy GOOG.

How to Trade 2012 For Major Profits

4 ETFs On Fire Right Now : BBH, KBE, KRE, SPY, XHB

The majority of index investors have been able to close out 2011 with positive returns in the month of December. The SPDR S&P 500 ETF (ARCA:SPY) is up about 1% during the month and a number of index funds that had been on hot streaks coming into December have continued to push higher. Here are four ETFs on fire right now.

Straight to the Bank
After muddling through a challenging Q3, the SPDR KBW Bank ETF (ARCA:KBE) hit its stride in late November. This ETF, which tracks the performance of national money center banks, is up almost 5% during the month of December and over 10% since Thanksgiving.

U.S. banks have been concerned that forthcoming industry regulations might mandate higher capital requirements than the international proposal known as Basel III. Regulators have seemed to relent in the face of pushback from the banking industry. The Federal Reserve's final proposal on Tuesday indicates that banks in the U.S. could potentially face higher capital levels than those called for in Basel III.

Regional banks have also taken part in the recent rally. The SPDR S&P Regional Banking ETF (ARCA:KRE) has risen almost 6% in the month of December and is up about 12% since Thanksgiving. Low interest rates and tight lending spreads will continue to be hurdles for the regional banks in growing their earnings, but they appear to be on much steadier ground than they were a few years ago.

Building Confidence
Shareholders of homebuilding stocks have endured more than their fair share of pain over the course of the past few years. The trend has recently begun to reverse itself. The SPDR S&P Homebuilders ETF (ARCA:XHB) has gained around 2.25% during the month of December and is up almost 10% since Thanksgiving.

The homebuilder confidence index rose for its third consecutive month in December to reach its highest level of 2011. The industry is positioned to profit from record low borrowing costs which could bring additional consumers to the marketplace for a newly constructed home. A sputtering economy is one of the biggest threats to this industry, but for the time being the improvement is welcomed.

One other ETF that has been adding on to its recent gains is the Market Vectors Biotech ETF (AMEX:BBH). The fund is up about 3% during the month of December and around 10% since Thanksgiving. The success of BBH in 2012 will hinge largely upon the ability of large-cap players to generate strong cash flows from their existing products, as this fund only has 26 holdings.

The Bottom Line
The recent rally by banking stocks has enabled index investors to make up some lost ground heading into 2012. Homebuilding and biotech ETFs have also ended the year on a positive note. We will soon see whether the breakouts of these funds are for real or whether they are technical recoveries that may prove to be short-lived.

'Flash Crash' Threatens To Return With A Vengeance

Financial Times
What should investors watch in 2012? As the new year dawns, there are plenty of short-term issues on the horizon, ranging from the eurozone to fiscal gridlock in the US to upheavals in the Middle East.

But amid that list there is also another, often ignored, question to ponder: could 2012 produce a repeat of the “flash crash”, the bizarre episode that hit the U.S. equity markets back on May 6 2010?

Think about it for a moment. A full 18 months have passed since the strange episode that caused the Dow Jones [.DJI 12217.56 -69.48 (-0.57%) ] to tumble 650 points in half an hour, wiping $850 billion off share prices, before rebounding. Since then, the issue has faded from view amid the eurozone drama.

But to this day, nobody has fully explained what really happened on May 6. Nor is there any evidence that the fundamental problems that caused the flash crash have been resolved. That leaves some scientists fearing that not only is a repeat of that flash crash possible, but it is probable — and next time round, it could be even more damaging.

To understand this, take a look at a fascinating transatlantic research paper published by the Bank for International Settlements. One of the paper’s co-authors is Dave Cliff, formerly a financial trader who now runs the UK government’s Large-Scale Complex Information Technology Systems project, an endeavour that analyses the risks of IT systems in sectors including healthcare, nuclear energy and finance. The other, Linda Northrop, runs a similar project at Carnegie Mellon University, which was initiated a decade ago by the US military.

In recent years, these two teams have used engineering and science skills to analyse what they call socio-technical risks, or the dangers that occur whenever complex technological systems proliferate, creating “systems of systems” that nobody understands. In early 2010, well before May 6, they released a brilliantly prescient report that predicted that a systems failure loomed.

Since then, they have continued their research, with sobering conclusions. Most notably, these researchers believe that the flash crash was not an isolated event; on the contrary, it was entirely predictable given how IT systems have proliferated to create a system of systems that is now interacting in unpredictable ways that regulators and investors cannot comprehend, far less control.

Usually, this danger is not visible to investors. After all, markets generally work well, leaving financiers in the grip of a phenomenon that Diane Vaughan, the sociologist, called the “normalcy of deviance” (based on her work on the Challenger 1987 space shuttle disaster): because people have sailed close to the wind and survived, they assume they can continue to do this — and turn a blind eye to anything that seems uncomfortably bizarre.

But the risks and near misses are rising all the time. Take May 2010. At the time, the wild gyrations in prices were deemed shocking. However, Cliff and Northrop think it could have been dramatically worse: if the systems failure had been a little later that day, prices would not have had a chance to recover before the US market’s close, which would have caused carnage when Asian [.N225 8455.35 56.46 (+0.67%) ] and European markets [.FTEU3 1011.92 10.53 (+1.05%) ] opened.

“The true nightmare scenario would have been if the crash’s 600-point down-spike, the trillion-dollar write-off, had occurred immediately before [US] market close,” they note. “The only reason that this sequence of events was not triggered was down to mere lucky timing. . . the world’s financial system dodged a bullet.”

And such luck may not be repeated. Since May 6, there has been a series of other, mini flash crashes in commodity markets. While regulators claim that introducing trading limits will fix the issue, there is scant evidence that this will really work, given the scale of this technological innovation.

Is there any solution? Cliff and Northrop offer one idea that might help: regulators and bankers should replicate what some scientists have done elsewhere and join forces to create a cross-border computing centre that is capable of extremely advanced, large-scale financial simulation. Their idea is that this would essentially replicate what is done in meteorology or complex engineering to map the markets — creating the equivalent of wind tunnels to test new financial products and ideas, and warn of looming trouble.

It sounds pretty sensible to me. There is even an obvious platform for this: the U.S. is currently creating an Office of Financial Research, which could host such a device. But don’t hold your breath; sadly, the OFR is floundering in its efforts to define its role, and most regulators still prefer to forget May 6 rather than admit in public that they are struggling to understand how modern markets really work. And that, sadly, is unlikely to change, unless there is another flash crash. It is not a comforting thought; least of all given all that is happening in the eurozone.

A New Global Economic Restructuring

COPPER WEAKNESS IS A WARNING SIGN

Back in January 2011, I pointed out that copper prices had in recent years started to track very closely with whatever the stock market was doing. But the key point about that relationship then was that when disagreements appear, it is usually copper that knows what the real story is.

That relationship continues to work to this day, with the two price plots mostly doing the same things, but with divergences usually working out the way that copper says that they should. By that I mean that if the SP500 makes a higher high but copper makes a lower high, that is a bearish divergence with bearish implications for both of them.

It is worth noting that there was a big “oops!” back in July 2011, when copper prices made a higher high as the SP500 made a lower high. In that instance, it turned out that the stock market was right, but copper worked extra hard in the weeks that followed to make up for lost time and to plunge to a lower value. Nothing works all the time.

The higher high for the SP500 going into the end of the year has not yet been matched by a higher high in spot copper prices, and that is a troubling development. But the problem with converting this observation into an actionable and tradable signal is that we never know exactly when such a divergence is actually going to start to matter. Sometimes it happens after just a few days of divergent behavior. Other times, the divergence persists over several weeks before it finally matters.

One other worry is a phenomenon I just shared with readers of our Daily Edition, which is the realization that a lot of currencies seem to undergo reversals around New Year’s Day. The end of 2011 arrives with commercial currency futures traders holding a huge net short position against the dollar. Commercial euro futures traders have the biggest net long position in the euro in the entire 12 year history of the reporting of euro futures positions in the Commitment of Traders (COT) Report. Commercial traders are also long the Swiss franc in a big way. Analysis of COT data is something that is featured every Friday in ourDaily Edition.

So what this all means is that we have a situation where an upward move for the euro (downward for the dollar) is likely because of what the COT data say, and because of the year end reversal tendency. A big drop in the dollar would be bullish for copper prices, because a cheaper dollar would mean that you would need more dollars to buy a pound of copper. So a potential big currency reversal could push copper prices upward, removing this current divergence between copper prices and the SP500. Accordingly, this relationship will bear watching closely as we move into 2012.