|It's the beginning of the new year, which is always an interesting time to reflect on the prior year's trades, the winners, the losers, and the lessons learned as a result. Doing this gives me a sense of what the next year has in store for the stock market, and I wanted to share it with you.|
This coming year, I think, is going to be a banner year for the market. Looking back on 2010 with the debt crisis, massive government spending worldwide, and with the Federal Reserve printing money like there was no tomorrow, the markets were in a constant state of anxiety. Still, the stock market can be viewed as a forward-thinking indicator where the future is often calculated into today's prices.
With recent trends climbing upward, it's safe to assume that many forecasters see the future as being bullish.
However, one point of concern is the level of printing taking place, flooding the world with US dollars. The dollar has been on a sharp decline as the money supply in 2008 recorded an estimated base dollar level of $825 billion, but it is now a staggering $2.4 trillion base level worldwide. What does that mean to you and your investments?
|For me, it says that there will be a retreat to commodities, particularly precious metals (Figure 1), as inflation will be the inevitable result. The government moved recently to remove both energy and food out of the accepted inflationary model that revealed true inflation to the public in what was obviously a move to hide the effects of printing money on a huge scale. |
Add to that, if the economy improves, there is a strong possibility that inflation will accelerate to a huge degree. Why? In the last year, it was reported that in the US the private sector was sitting on $2 trillion of capital and banks were sitting on $1 trillion in capital. This was the result of the massive amount of reform that the current government undertook on Wall Street, banking, and health care.
In the business community, the massive reform bills seem to have the psychological effect of leaving business and banking doubtful on the true consequences on their bottom line so they stopped hiring, lending money, or investing in new enterprise.
|FIGURE 1: GOLD, DAILY. Gold has been a big winner over the last year and looks to continue that trend in 2011 as a market leader.|
|Graphic provided by: StockCharts.com.|
|Once that money hits the market as the future begins to brighten, inflation will accelerate.|
Gas is already starting to climb and some food items have already increased more than 40% in price. Already stocks that deal with commodities that have been on the decline are starting to climb higher.
That said, companies that deal in commodities as well as commodities themselves should lead the next bull market.
So continue to play the trends in the market but look for commodity-related stocks to emerge as leaders in the next couple of years. But as always, be prepared to change your mind as soon as the market does.
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