2011 bigtrends market outlook

2011 Market Outlook

www.BigTrends.com [email protected] 1-800-244-8736

2

BigTrends 2011 Market Outlook | www.BigTrends.com

Thank You

Thank you for downloading the 2011 BigTrends Market Outlook. In the next 33 pages you will find our analysis of the world financial market and how it will impact your investments throughout 2011. In keeping with the tradition of our annual market outlooks we will review historical patterns of significance, interest rates, international trends, as well as a detailed look into the world of volatility. I invite you to review our specific stock and ETF recommendations that we believe are poised for growth in 2011. While this report will yield valuable long-term information we believe that active management of your capital is paramount to passive management so we would like to offer you 30 days of ANY BigTrends recommendation service for $30!

3


Table of Contents 2011 Market Outlook……………………………………………………….4 by Price Headley 2011 BigTrends Outlook for Option Volatility and the Markets………..7 by Moby Waller 2011 BigTrends Fed and Economic Outlook……………………………16 by Bob Lang 2011 BigTrends Top Stock Picks and Market Overview……………….21 by Scott Downing 2011 BigTrends International & ETF Outlook…………………………...27 by Andrew Hart

4


2011 BigTrends

Market Outlook

By Price Headley

Looking Forward to Market

Action in 2011

As the market finishes off a relatively impressive 2010, where the stock

market shook off a barrage of bad news to see the major market averages

all finish up over 10%.

The most encouraging aspect of the relative index performance is that the

leadership to the upside was led by the Russell 2000 (RUT) and then the

Nasdaq 100 (QQQQ), compared to the S&P 500 (SPX) and Dow

Industrials (INDU). That tells us that the fund managers are still playing

“offense” as they prefer to buy the more aggressive smaller-cap RUT and

tech-heavy Nasdaq names, which means money is still flowing into stocks.

And with a reported $1.9 trillion in cash on the

sidelines, there‟s no reason to think that can‟t

continue.

As you‟ll see later in this report, the 3rd year of the

presidential election cycle is known to be the most

bullish of the 4 years, with historical gains in the Dow

Industrials of more than 10% since 1950. But as we

break it down for you even further, the quarterly gains

suggest the first half offers the best 2 quarters in the

entire four-year cycle.

5


The chart outlook shows that the Nasdaq‟s move to a multi-year high gives

us more upside potential, as once the Q‟s cross 55, potential exists to 70

on the long-term charts.

The S&P has retaken the critical 1200 level with potential to 1400, an

encouraging sign. The Dow is running into multi-year resistance around the

11,700 mark, though if we can get through that area, the upside potential

appears to be to 12,500 at least and 13,000 next.

Dow Jones Industrials (INDU) Weekly Chart

If there are concerns, I have two major ones. First, expectations for a

positive year for stocks are relatively high, meaning the bar is raised and

the potential for negative surprises exists. One recent “bell-ringer” was the

cover of USA Today, where all 5 market strategies projected gains of 10%

or more for 2011. This smacks of too much optimism, as usually there will

be at least one dissenter in the mix. Ultimately, the stock market is all about

expectations, and they are too high currently.

6


One of the best times of the year to gauge these expectations is during

quarterly earnings season, as if you see strong reports (better than

expectations) but stocks tend to fall, that would be a sign a correction is

coming. But for now, the reaction to recent quarterly earnings has been

relatively positive, with the last quarter seeing some 78% of companies

meet or beat expectations and stocks had a superlative quarterly advance.

My other main concern is Federal Reserve policies. The second round of

“quantitative easing” or QE2 that was announced officially on November 3rd

as a $600 billion infusion into the Treasury Bond market over the next 9

months did not have the desired effect, as bond prices tanked and rates

rose on fears that the Fed‟s printing presses were getting cranked up to

spark future inflation.

I‟ve agreed for quite a number of years that the real inflation rate is a lot

more than the government-reported CPI and PPI numbers, which has kept

me bullish on gold and the metals, which should do well again in 2011 but

also now suffer from high expectations (like the stack of gold coins on the

2001 Forecast issue of Fortune magazine recently – magazine covers tend

to be good contrary indicators looking back 1 year later, so don‟t be

surprised to see a selloff in metals be potentially violent when it finally kicks

in, likely in the 2nd half of 2011).

7


2011 Outlook for

Option Volatility

and the Markets

By Moby Waller

Fibonacci Retracement Has

Guided the Way

As they say, “those who forget the past are doomed to repeat it”. With this

in mind, let‟s take a look at what we told our BigTrends.com clients back in

late-2009 in our 2010 Market Outlook regarding the long-term Fibonacci

retracement charts of the S&P 500 Index (SPX) (SPY) and the CBOE

Volatility Index (VIX).

The results are impressive, to say the least:

We‟ve been on top of the big picture market retracement rally that‟s been in

place from 2007 stock market highs to the 2009 panic lows. On the SPX

Weekly Chart below, a Fibonacci retracement was pasted on these key

levels, and it gave us clear targets for 2010 in terms of the longer-term

ranges. The volatile price action we‟ve seen over the past few years gains

clarity and has been very accurate when you examine it with these

methods.

The bottom line is the bottom line, and we anticipated a range on the SPX

of 1,014 to 1,228 based on the Fibonacci retracement patterns – the actual

range of the SPX this year has been 1,010 to 1,250!

8


So what does this long-term Fibonacci chart tell us is in store for 2011?

Well, you can see below that we‟ve had 2 weekly closes above the key

61.8% retracement level of SPX 1,228 this month. This looks to be a clear

confirmed upside breakout of a range that had contained the market for

about 1.5 years. You can see that we had remained nicely within the

38.2% to 618% retracement range (yellow trendlines) from mid-2009 to the

end of 2010. Now the market is poised for a higher move.

How high will we go? Well, the next logical target is the 76.4% retracement

level of 1,361 on the SPX (aqua trendline). That‟s about 9.1% higher than

where we are currently. How long will it take us to reach that level? In my

analysis, 6 months at the most, see the next passage for more detail on

this. Overall, the anticipated SPX range for 2011 from this chart is 1,100 to

9


1,400 – with a possible outlier upside run to test 1,500 and the highs of

2007.

Historical Calendar Election Trends Are on the

Market‟s Side

Combined with the above Fibonacci breakout, we also have a strong

historical calendar trend in place that makes the first 6 months of 2011

poised for gains. This is the 3rd year of a mid-term election cycle, and the

data shows that the first 2 quarters of the 3rd year are historically very

strong for the stock market. See the table below:

10


This data from the past 60 years shows that the 4th quarter of a mid-term

election cycle what we are currently in Oct to Dec 2010 has a very bullish

bias for stocks. However, what many investors and traders don‟t realize is

that this follows through for the next 2 quarters of the next year! This

historical data has been accurate thus far for 2010‟s 4th quarter, as we‟ve

seen a strong market – so that is even more reason to anticipate that it will

hold true for the next six months. Beyond the first half of 2011, I‟m not as

positive on the markets in the second half of the year – I wouldn‟t be

surprised to see us have some volatile moves in a sideways type trading

range.

11


Volatility Will Head Lower, But How Much?

Now on to the VIX, market volatility and option volatility. We‟ve been

tracking and trading options for over 20 years and have been utilizing the

CBOE Volatility Index (VIX) since its inception in the 1990s. This is a great

measure of the sentiment and fear level of option traders, as it basically

shows exactly what volatility expectation they have for the market in the

current environment. We‟ve seen some unprecedented volatility in the

markets since 2007 in both directions. What did we say last year at this

time about the VIX outlook for 2010? Take a look at the chart below:

And what did the VIX do in 2010? Take a look below. We anticipated a

lower range on the VIX of 15 to 30 in 2010 – and it basically moved within

12


that range for the whole year, barring a couple of spikes higher (which is

expected from unusual news events, even in a bullish market). And the low

on the year for the VIX has been 15.23 … basically exactly where we said

the bottom would be.

And now we move into 2011, what lies in store for this measure of index

option volatility? In my view, and this combines nicely with the forecast of a

bullish 6 months ahead, we‟re likely to see a lower VIX range throughout

2011. The important low should be 12.5, although we potentially could test

the 10 level. On the upside we largely will be contained by the 25 level,

although there always is the possibility of short-term VIX spikes. The

difference for 2011 is that I anticipate that VIX upward spikes will be milder

and shorter-lasting than in previous years – basically more similar to the

quieter volatility moves we saw in the pre-2007 years. Of course, there are

13


always can be the unexpected major event that shakes up the world‟s

markets and jacks up volatility much higher. But bottom line, the 12.5 to 25

area will be the range for the VIX throughout 2011 in my analysis.

Bottom Line And Additional Trading Insights For

2011

So we‟ve mentioned the bullish setup for stocks in the first half of 2011 –

this indicates traders should buy dips in that time and also be prepared to

jump on board and profit from upside accelerations that may not give much

of a pullback. The VIX will have a lower range, but won‟t drop below

12.5/10 – and upward spikes are likely to be shorter-lived and less volatile

14


than in the past couple of years. Here‟s a couple of other forecasts and

insights I wanted to pass along to our BigTrends.com clients:

As far as Index ETFs and Index Options, the Russell 2000 (RUT) (IWM)

and Nasdaq 100 (QQQQ) (IWM) outperformed the other broad market

indices this year. This is generally an underlying bullish sign of strength for

the markets when these types of indices outperform, as they are more

growth-oriented and a bit smaller-cap. Should the market upside continue

into 2011 as we expect, then these Indices/ETFs should continue to

outperform.

Regarding the Dow Jones Industrial Average (DJIA) (DIA) – be cautious

depending on your risk level when trading the DIAmonds and its options,

when compared to the S&P 500 Index (SPY) (SPX) for example. The DIA

is comprised of much fewer stocks, and this lack of diversification can

cause more volatile moves (in both directions). To some degree this can

increase risk due to the influence that 1 individual company can have on

the fortunes on the DJIA. Something to keep in mind for your trading in

2011.

On the international front – I like the India market

(PIN) ETF to continue to be strong in 2011. And

from a contrarian perspective, the relative

underperformance of the Brazil (EWZ) and China

(FXI) ETFs leads me to anticipate that they will

outperform in 2011.

Regarding Gold and Commodities – although we‟ve

been bullish on Gold and many Hard Commodities

for some time, the overwhelming bullish sentiment

among many novice investors and the general

public for Gold in particular is raising alarm bells to us as contrarians.

Hence, I anticipate that the long

bullish run that many commodities have been on will

have a pause in 2011.

15


And finally, keep an eye on the Financial sector (XLF), which seems to

growing more and more influential in both the U.S. economy and on the

stock market. It‟s always been considered somewhat of a leading group,

and this seems to be becoming more and more so in the current

environment. Strength and strong earnings in financial stocks will bode

well for the markets in 2011.

Have a great and highly profitable New Year!

2011 BigTrends

Fed and Economic

Outlook By Bob Lang

2010 Rewind

This was one of the most bizarre years that I could remember. Not only did

the equity markets suffer from the anguish of higher volatility and fear, but

also the bond market became the safe haven of investors. This while the

treasury issued bonds at a record pace and the Fed bought them up just as

fast! The call this last act Quantitative Easing (QE), or keeping rates

artificially low in order to stimulate business and hiring. It is not new nor is

it unhealthy but the magnitude of Fed easing is unprecedented. The first

round of QE seemed to be ineffective at best, so in late 2010 Chairman

Bernanke announced another dose of QE, affectionately known as QE2.

Could 3, 4 or 5 be far behind? This latest move by the Fed signaled they

will buy 600 billion worth of bonds in the short term and may increase that

amount. Fed policy remained unchanged the entire year, no increase in

short term rates. Make no mistake, the Fed is on a mission – and that is to

stimulate the economy via easy money to get the jobs market in better

shape and provide stable pricing. As of this writing the jury is still out on

this self-imposed mandate.

Bond Roller Coaster Ride

In 2009 bonds had a terrible run, yields on the 10 yr bond climbing from a

low level of 2.2% to just over 3.8%. It‟s no wonder stocks enjoyed a nice

17


ride. Last year fell sharply until mid-year, bond bulls enjoying a nice rally.

Late in year bonds started to take a hit as the reality of Fed easing finally

kicked in, bondholders preferring not to have long duration in their

portfolios. Bonds may eke out a slight gain for the year but will trail

equities, see the chart below. Perhaps the Fed is being taken seriously at

least from the standpoint of fixed income holders. Or, maybe the economy

is actually growing with little inflation. To be sure, Chairman Bernanke

would like to avoid the disaster of the Great Depression, when prices fell so

far that it caused a swirl of deflation that took over a decade to overcome.

The Fed‟s Challenges

There is an old saying coined by famed investor Marty Zweig in the 1980‟s

– Don‟t Fight the Fed. Those words ring as true today as back then. Fight

the Fed at your own peril. In fact, that was truly the case in 2010 and

should be thought of in 2011. When the Fed is in easing mode, it‟s time to

18


go along for the ride. Nothing in their current playbook suggests anything

has changed and probably won‟t until the job market normalizes. Chairman

Bernanke is on record as saying the unemployment rate is far too high, and

he‟ll keep monetary policy accommodating until such levels are acceptable.

Their dual mandate – price stability and low inflation – seem to be working.

In 2011, the Fed may face some headwinds of inflation, which may require

easing off the pedal, perhaps a rate hike or two later in the year, see the

following chart. Existing troubles overseas, especially in Europe also could

derail the economic recovery. I suspect the Fed‟s medicine to the economy

will work this time around, and later in the year we‟ll see robust growth with

firms hiring for the next economic and business cycle.

19


Wildcards

It is no secret that gold/silver have broken out to new relative highs. There

are many dynamics that have driven higher prices in the precious metals

but the most important is the deteriorating fiat currency, otherwise known

as the US dollar. See the chart below. China, a big supporter and buyer of

US debt and assets has made it public they are displeased with the US

dollar policy. While the jawboning happens there is risk that our biggest

trade partners will stop buying our debt – they have been the biggest

purchasers for several years now. The Euro currency is another excuse to

diversify out of dollars, which is a competitor to the greenback. Back to the

metals, other countries (China, India, Russia) may look at the hard

currency equivalent as more stable than the buck. Geopolitical issues are

always a consideration, and that often brings some interest in the dollar.

20


Economy Bottom Line

The jury is out on the economic recovery. Everyone seems to have an

opinion, and most arguments are compelling. However, there is but ONE

captain steering the ship, and the man at the controls is Chairman

Bernanke. He holds all the game pieces and moves them around

whenever he wants them – Fight the Fed at your own risk. I suspect the

economy can continue its healthy recovery in 2011 and beyond, putting the

nightmare of recent years in the distance.

2011 Stock Picks

I had an excellent trading year in 2010 for our BigTrends clients, as this

was a great stock picker‟s year. For 2011, here are a couple of longer-term

bullish plays for you:

Oracle (ORCL)

Citigroup (C)

Potash (POT)

21


2011 BigTrends Top

Stock Picks and

Market Overview

By Scott Downing

Keep an Eye on Valuations

and the Economy

2010 has been a year of varying emotions as investors have been put to

the test from start to finish. There are still many concerns about the global

economy and where the next major issue will arise (Europe is still the

leader), but the potential for economic prosperity in the future continues to

grow. So what can we expect from the stock market in 2011?

As we do at the end of every calendar year, we need to take a step back to

review the past before we can accurately predict the future. 2010 brought

upon the „flash crash‟ in May as investors saw the Dow fall 992 points intra-

day, and this event scared retail investors so badly that some might not

return to the market for another couple of years. Despite that panic selling,

reasonably strong corporate earnings and continued improvement in

economic data slowly helped the market to recover those losses plus some

more.

Even though we are not known for fundamental analysis at BigTrends,

there is a significant fundamental number that needs to be in the spotlight:

the S&P 500 P/E Ratio. The S&P 500 closed out 2009 with a P/E ratio

around 20, which was right around the median for a healthy market

historically.

22


We have now seen valuations rise back to near 23 which teeters on the

edge of an extreme. For this reason, markets are likely to stay rather

volatile into 2011 as investors struggle to buy stocks given the high

valuations. I expect the market to close out 2011 flat to lower as finding

trends to trade becomes more challenging with most stocks having high

multiples again.

The two key buzzwords that are likely to dominate the headlines in 2011

are jobs and rates because the health of the economy is likely to be

gauged by those two metrics. Unemployment in the US remains

historically high and will eventually have to come down if the economy is

going to grow through the recession. The market is likely to over-react

initially to jobs data both positive and negative. Consistent job growth

coupled with a slowly declining unemployment rate is what is needed to

extend the recent rally.

Then there are rates, as every trader will be focused on the Fed and their

actions, specifically in the first half of 2011. Many believe that we are

already starting to see the signs of inflation take root in the United States,

while others contend that the economy is so weak that interest rates must

remain at zero to promote a culture of financial growth. It seems plausible

that the most likely scenario for interest rates would be a period of

23


stagflation for the US if problems in Europe and Asia continue to pressure

the global economy further.

With all of this said, there are still going to be some great trading

opportunities for those who are knowledgeable in 2011. Next year could be

a true stock-picker‟s dream as sector rotation will be critical. There will be

trade-able trends that develop, but they will not be as broad based as we

have seen the last two years, so being able to find and trade specific out-

performing stocks will be paramount to success in 2011. IT and Health

Care are poised for big gains next year, so two of my three favorite stocks

for 2010 come from those sectors. My third pick is a sturdy industrial that

should benefit from any growth globally.

24


3 Top Stock Picks for 2011: Danaher Corp (DHR)

25


Fiserv (FISV)

26


Varian Medical Systems (VAR)

27


2011 BigTrends

International & ETF

Outlook By Andrew Hart

Success Breeds Success –

A Look Back At 2010 ETF

Picks

With my focus on short-term trading it can be quite the daunting task to

predict an entire year‟s worth of market action. Despite this being outside

my forte I do thoroughly enjoy writing down ideas and researching longer-

term charts to gain a better perspective. I enjoy it because it works. In

fact, my previous outlooks have been surprisingly successful and have

outperformed the market each year. We will look at these selections later.

This will be my third year disclosing my own 12 month outlook so let‟s get

started. In this year‟s statement I will focus on Exchange Traded Funds

(ETFs) and international opportunities and believe it or not 2010 was an

odd year for those well-known emerging markets.

Against all odds US equities actually outperformed many emerging markets

in 2010. It is a surprise to many that Chinese and Brazilian equities

actually underperformed the S&P -- a quick check on the associated ETFs

show that the S&P500 (SPY) has never outperformed Brazil (EWZ) and

China (FXI) in a bullish year. I looked back to the inception of EWZ and

FXI - 2000 and 2004, respectively. That being said, should you invest in

any emerging markets this year? For that matter should you risk your

capital in the Euro zone? Whether the BRIC (Brazil Russia India China)

superstars or the developed economies in Europe there are defined

28


locations that you should avoid and others that are showing a lot of promise

for 2011.

In the last two years I‟ve recommended 6 ETFs that I believed would

outperform the market in those respective years. This year I will

recommend my top three. In reviewing my 2009 selections, 3 out of 4

outperformed the NASDAQ 100, which was the leading index in 2009 up

43%. In 2010 we recommended two ETFs and both outperformed the

market. Here‟s a quick synopsis of my top ETFs for previous years:

Andrew‟s 2009 International & Sector ETF

Recommendations

Name Ticker 1 Year

Performance

Progressive Energy

Portfolio

PUW 50.89%

Steel Index SLX 79.54%

Telecom & Wireless PTE 16.55%

Latin American 40 ILF 69.92%

Andrew‟s 2010 International & Sector ETF

Recommendations

Name Ticker 1 Year

Performance

29


Small Cap Brazil BRF 18.19%

Middle East & Africa GAF 22.37%

The Top 2011 International Opportunities:

As you can see, we have been fortunate enough to significantly outperform

the market with our selections in recent years and plan to continue our

streak with this year‟s international highlights. The selection process is

based on technical analysis and primarily trend based (not value or

reversals) so it should not be surprise that China or Brazil will not be in the

running since they underperformed in 2010. Note that I still like Brazil

Small Caps (BRF) into 2016, which is discussed in detail here.

In my preliminary research for choosing my favorite three for 2011 I came

across a core theme that I had not recognized. The major emerging

market „brands‟ like the BRICs were not performing well. This made the

selection process more daunting - it was my general assertion that certain

sectors within these emerging giants would be strong. This was simply not

true.

Based on my analysis I found seven international leaders for the next 12

months and it was hard to initially concentrate that list down to three. The

full list of the strongest areas is below:

Name Ticker Price 52 Week

High

52 Week

Low

Thailand Index THD 63.05 68.70 37.65

Chile Index ECH 79.85 80.38 27.27

http://www.google.com/url?q=http%3A%2F%2Fseekingalpha.com%2Farticle%2F228848-just-one-etf-small-cap-composition-makes-for-a-brazilian-consumer-play&sa=D&sntz=1&usg=AFQjCNFj5nwPU5kXa7XmBSOVZRp7Dbpfzg

http://www.google.com/url?q=http%3A%2F%2Fseekingalpha.com%2Farticle%2F228848-just-one-etf-small-cap-composition-makes-for-a-brazilian-consumer-play&sa=D&sntz=1&usg=AFQjCNFj5nwPU5kXa7XmBSOVZRp7Dbpfzg

30


Singapore Index EWS 13.41 14.56 10.37

Indonesia Index IDX 83.80 92.75 21.53

Turkey Index TUR 63.16 79.00 44.40

Malaysia Index EWM 13.93 14.41 10.18

Emerging Mkt

Bond

EMB 106.36 114.14 97.08

In order to select the best-of-the-best international ETFs I began with this

list and started pairing it down based primarily on the criteria below. You

will notice that I did not use many fundamental factors (if any) into my

consideration. For those of you that would like to see those statistics I

have included an additional chart for your reference.

Core Factors

● Monthly/Weekly Trend Strength

○ William‟s %R

○ Bollinger Bands

○ Acceleration Bands

● Average Daily Volume

● Expense Ratio

● Diversification of holdings

31


Comparison Sheet

Overall, I am very encouraged by the final selections - after carefully sifting

through hundreds of ETFs here are my top three international ETFs for

2011.

32


BigTrends Top 3 International ETFs for 2011:

iShares MSCI Chile (ECH)

Most of us think of the miners‟ survival story that made headlines when we

think of Chile, but they can do a lot more than mine. EWM is incredibly well

diversified, which shows the breadth and depth of the Chilean economy.

As one of the strongest leaders in recent months I believe this will continue

to lead over the next several months. It won‟t be without volatility but the

fundamental base of strength is evident for market outperformance.

33


iShares MSCI Turkey (TUR)

Surprisingly, the Turkey ETF is heavily weighted in Financials - something

you would typically find in a more developed country. Many emerging

markets are heavily dependent on materials and agriculture for growth so

this is one of the bright spots for TUR. Of course, the second largest

holding is materials so the expected growth in that sector will also benefit

this selection. It‟s an ironic twist on fate, but to the bureaucratic mess

associated with Turkey‟s future inclusion to the European Union may well

make it a stronger country for investment purposes. Without being directly

hampered by Ireland, Spain, Portugal and others Turkey has set itself

apart.

34


iShares MSCI Malaysia (EWM)

The Malaysian ETF is also well diversified, although the largest sector is financials. I expect many countries in the Pacific Rim to outperform in 2011. Singapore, Vietnam, Indonesia to name a few. In the chart EWM may look overextended but taking a step back to the 10-year horizon Malaysia is actually underperforming the S&P500 so if you‟re looking for shorter-term strength and longer-term value EWM is a balanced selection.

BigTrends Wrap Up This report should be used as a valuable trading tool throughout 2011 but we also believe that active management of your trading is necessary in today‟s market so we are offering you 30 days of ANY BigTrends recommendation service for only $30! Call 1-800-244-8736 to speak with your BigTrends Trading Consultant for more information. Trade Well,

2011 bigtrends market outlook

Education