Stocks, oil and gold in 2011

2011 is here and the pundits and commentators have been making their 2011 market predictions. I for one believe predicting future market moves is a futile endeavor where if you are right one year later you are viewed as a sage; if you are wrong nobody seems to remember or care.

In fact, I try not to read any predictions for fear that it might place a bias in my subconscious. I am a trader and thus have no need for emotions, bias, or opinions when trading. I try to stay away from the media and the pundits as often as possible.

With that being said, the managed money crowd finished up their window dressing and the performance anxiety of 2010 will slowly shift to assessing their portfolio risk and making appropriate adjustments for the New Year. Based on current market sentiment it would make sense that most money managers are bullish as cash levels remain quite low when looking at mutual funds and institutional money managers’ portfolios.

S&P 500

The S&P 500 is extremely overbought in almost every time frame and headline risk remains high. At current price levels I would not be interested in being long the S&P 500; in fact I would likely be taking some money off the table as 2011 rolls in.

I think opportunities are going to present themselves in 2011 for outstanding longer term entries into the equities market; however a disciplined approach will be required. Headline risks such as continued monetary and fiscal issues in the Eurozone, municipal budget concerns and potential defaults, potential for rising interest rates, inflation / deflation, and rising energy prices to name just few. Unfortunately some, if not all of the headline risks listed above will likely come to pass. Having fresh capital ready to deploy and developing a trading plan ahead of time for solid entry points will likely lead to a positive trading outcome in 2011.

I believe there are going to be some outstanding trading setups in 2011 regardless of market conditions or economic factors, but in order to be prepared we need to have trading capital available and a trading plan prepared. The weekly chart below illustrates some key support levels on the S&P 500 e-mini contract.

At some point in the future, the S&P 500 is going to suffer from a correction and I intend to be prepared to take advantage of lower prices in my longer term investment accounts as well as in my short term option trading accounts. While I am generally a contrarian when sentiment and bullishness are this high, deep down I am hopeful that the economic recovery continues. However, I am not blind to believe that the worst is over and it is smooth sailing from here. There is nothing about financial markets that is ever easy, and when the directional bias is this strong I tend to step back and develop contrarian strategies just in case the crowd is wrong.