Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

What the Beginning of 2012 holds for the S&P 500 & Gold

“Never make predictions, especially about the future.”
~ Casey Stengel ~

With the new year upon us, market prognosticators and financial pundits begin producing their predictions for 2012 while portfolio managers and individual investors adjust their investment allocations based on what they expect to transpire in the coming year. I refuse to make long term predictions in an environment where central bank planning and currency wars are percolating.

My primary focus is on risk with every trade that I enter. Members of my service are likely tired of my incessant ramblings about risk premium or lack there of. My focus for 2012 is to improve my trading skills and provide a service that produces strong risk-adjusted results.

I had a very strong year in 2011 for members of my service, compiling a total return for the year above 30%. Roughly 70% of the trades I entered were profitable during 2011, but my track record had nothing to do with outstanding predictions. Instead, my methodology as an options trader revolves around using volatility and time decay (passage of time; Theta) as profit engines.

I spend a great deal of time analyzing implied volatility of underlying assets while looking for opportunities to capitalize on long term time decay. As the year progressed, I found that trading less underlying assets and staying focused on producing profits helped to improve my trading in 2011. My intentions are to become even more mechanical with my risk management and spend more time focusing on a smaller group of underlying assets.

Instead of predicting the future in specific underlying assets in 2012, I intend to focus on reducing risk and maximizing overall performance by putting out even more highly probable trades for members.

However, I still intend to use technical and fundamental data to help guide my trading decisions in 2012. I just find it to be a waste of time and energy to make predictions about events which are unknowable at this point in time. In other words, my crystal ball is not cloudy or broken, I simply never had one to begin with!

Ultimately I am an options trader, and as such I consistently monitor the Volatility Index (VIX) for clues about future price action before consulting the charts or reviewing fundamental analysis.

The holiday season typically sees volume and volatility dissipate with 2011 being no exception. From December of 2009 through December of 2011, the month of December has marked the annual low for the volatility index for each of the previous 3 calendar years. The weekly chart of the VIX is shown below:

As noted above, if history repeats itself we should see a spike in volatility from current levels throughout 2012. While anything could happen, the VIX is trading at a level where there is a lot of complacency in the marketplace. My expectation is that volatility will most likely increase at some point in the 1st Quarter of 2012.

If my expectations are fulfilled, we should see some selling pressure set in for equities in the not-so-distant future. I think a push higher to around the 1,292 price level could play out in the S&P 500 potentially, but I would not be surprised to see prices work lower as earnings compression is likely.

Slacking global growth is already beginning to hit the main stream as Europe looks poised to move into a recession. If global growth continues to decline paired with a strengthening U.S. Dollar, earnings season could be quite disappointing, or at the very least flat. The daily chart of the S&P 500 Index shown below illustrates current key price levels:

As it stands right now, I am firmly entrenched within the mindset that 2012 has the potential to be a historic year in financial markets. Currently the majority of equity indices are coiled up in triangle or wedge patterns that should produce very sharp moves. The chart of the S&P 500 Index above illustrates the wedge patterns that are present on most daily charts of U.S. domestic equity indices.

With all of this talk about the European sovereign debt contagion, inquiring minds might ponder why gold and silver have taken such a beating recently. The answer to that question revolves around the massive bullish run that precious metals have seen for the past few years.

Momentum around the $1,900 price level because extremely overbought and a major pullback was needed to work off overbought conditions and push out weak hands trapping late comers to the gold bull. Back on October 23, 2011 I posited the following weekly chart of gold:

We are in the midst of the pullback that I illustrated back in October and I expect to see prices ultimately work a bit lower before reversing. A test of the 1,400 – 1,450 levels in the next 6 weeks seems likely.

Presently the U.S. Dollar Index is showing overbought conditions, but one last push higher does not seem out of the question. The daily chart for gold is shown below with my expectations for the next few weeks’ price action:

Ultimately this is not a precise price prediction, but once gold does find a bottom a strong move higher becomes quite likely. The central banks around the world are printing money and if global recession fears begin to culminate in earnest, we could see additional rounds of monetary easing in various forms.

While I do not make predictions, the fundamental backdrop for precious metals after this strong pullback appears to be quite bullish from these eyes later in 2012 and beyond.

In closing, I expect that 2012 will be a potentially wild year for traders and investors. The most important headlines at the beginning of the year are the European debt crisis, 1st quarter corporate earnings, and the issues in the Middle East which directly impact the price of oil.

The outcome of these scenarios has the potential to alter financial conditions in a considerable fashion throughout 2012. Right now we have no clear evidence as to the finality of these issues, thus rendering predictions for 2012 a futile endeavor!

I wish everyone and their families a safe and prosperous 2012!

 

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.