With yesterday’s decline the S&P500 gave up the little gain it had for the year and sank back into negative territory. This has been a very volatile year for SPX, trading at a high of 1,370 and a low of 1,075. Regardless of what happens the last 2 days of 2011, barring any unforeseen huge 3% rally or sharp 3% drop, SPX will finish the year pretty much flat. We’re going to do our best Sigmun Frued impression and analyze what the psychological implications of a flat year for SPX could mean moving forward.
We must first realize where the S&P is coming from. 2 & 1/2 years removed from a decennial buying opportunity SPX had risen over 100% from the March 2009 666 bottom to the April 2011 high of 1,370. After peaking at 1,370 though, SPX declined over 20% to 1,075 but is now only off by a little more than 8% at 1,250. While a pullback after a big move off the bottom is expected and healthy, we wonder if the market may have a different interpretation in this “quick fix” market environment.
Everything from our political system, technology, and economic theory put forth by the Fed seems to resolve around the here and now. Many people in power have made what could be the costly mistake of not taking the long term approach on certain issues, both politically and economically. However, what may prove to be an even bigger mistake as market participants, is not recognizing the mistakes of those people in power.
The greatest thought will rule in 2012. If the dominant thinking is that politicians around the world can no longer fuel a stock market rally that, since March 2009, has been running more on undervalued prices and government stimulus than any real economic recovery, we are heading for lower prices. Lest not forget, when stocks like AAPL, GE, F, GOOG are all trading at multi year lows (10,20, 30 year lows in some cases) it is easy to swoop in and buy stocks in good faith.
Fast forward to 2012 though and there is a great conflict going on with some of these stocks. AAPL for example, is near all time highs, and the goal is to buy low and sell high, not buy at an all time high and hope to sell at an all time higher. Then you have a stock like BAC, which is revisiting levels it saw in March 2009. The buy low rule simply applies in regards to BAC but could it be that it is too low too soon?
Said another way, BAC was just at $5 in March 2009, only 2&1/2 years ago, hardly a long time to the long term investor. And remember, in the end, long term investors are what keeps the market going higher, us traders simply ride their waves. The fact that BAC is back down here at these levels may actually keep investors away as they worry about why BAC has gotten so low again in the first place? In 2008 BAC got low because of the financial crisis (at least that’s the common thinking), but why is it so low again in 2011?
Hell, why are all the banks so low again in 2012? Because of the Europe crisis? These are the questions that come when the market turns flat after a rally. More than that, these are the types of questions that hang over the market and keeps it flat. While SPX has managed to hold firmly above its 2010 lows, banks (XLF) cannot say the same.
So far anyone who sold after the 100% run up in SPX is feeling pretty good about themselves. Anyone who bought in this year is wondering if they just bought at a generational high. Such a feeling is of course the exact opposite of those who were buying in March 2009 thinking they were getting in at a generational low. Time and price action still needs to determine who is right in that one but the mere fact that we’re even throwing those terms out there speaks to role psychology will play in 2012 coming off of a flat 2011. The beautiful thing about a flat year though is that it gives us a key range to watch. If the 2011 highs break, look out above, and if the lows break… look out below.
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