In last week’s Musings of a Money Manager newsletter I spoke about my outlook for 2012. Here are a few of the important highlights for non-subscribers (you can subscribe for free on the right hand side of this page):
For 2012, I am closely following three big themes:
1) A golden cross pattern
2) The price of copper
3) The presidential cycle
The Golden Cross
First off, let’s take a look at what happened last year — well, nothing happened, which is rare. Eighty percent of the time, markets stay in a well-formed trend (either up or down). Last year, the US stock market stayed in a sideways pattern, resulting in a gain of .6 percent for the year.
Again, this is rare. January’s Time magazine points out that the last time the market moved so little over a one year period was back in 1970.
What this means is that investors will be looking for a breakout of this pattern before moving back into the market. Fortunately, this breakout started to occur right before Christmas and continues today.
One very strong buy signal for investors is the “golden cross”. The golden cross is a simple signal, but is followed by many in the financial industry. I spoke about this pattern in a recent blog post (on johnrothe.com), titled US Equity Markets: Half Empty or Half Full?.
As the US stock market is breaking out of last year’s sideways pattern, we are about to see another golden cross occur — a good sign for the market.
Caution: Science Ahead
What does copper have to do with the stock market?
Copper is an amazingly conductive metal, AND a fantastic gauge of the overall health of the global economy. From September 2011’s Economist:
“Copper’s excellent conduction of electricity and heat means that it is used not only to cable and pipe the globe. An average car contains over 25kg of copper; electronic gadgets, from PCs to mobile phones, use copper for wiring and contacts. Its ubiquity means that rising demand should provide an early indication of an uptick in manufacturing and construction. Copper sagged in the early stages of the credit crisis, for example, and then started to pick up at the end of 2008, some months before the stock market began to rebound.”
As we can see below, the price of copper is breaking last year’s downward trend and starting to rise — a good indication that demand for the metal is starting to increase. This is another promising sign for investors.
The Presidential Cycle
Historically, years 3 and 4 in the presidential cycle are strong market years. Last year, the theory didn’t fall into place with a large gain, despite the fact that since 1945, 94 percent of year 3 cycles have been positive.
The year 4 cycle also tends to be positive, especially in the first and second quarters as the presidential election becomes the hot topic.
Regardless of who wins the election this year, the economy will be the main focus of the campaigns. This is good news for the markets, as investors tend to get more positive as new ideas are presented on how to fix the system.