2011 Market Preview

The first trading day of 2011 has come and gone for the most part (some still closed in lieu of New Year's Day, including Canada, U.K., and Japan) and positive returns kicked off 2011 with most major world markets gaining well above one per cent. This bodes well for those with strong convictions in the January almanac.

Since 1928, when the S&P 500 ends the month of January with gains, the market has finished positive from the previous year 73 per cent of the time. More impressive: since 1950, when the first week of January finishes positive, 86 per cent of the time the market finishes positive as well, with an average of 14 per cent gains.

It's a little premature to be making predictions one day into the year and foolish to predict today's price action is a fair indicator for the rest of the week, but with more and more bullish news coming out of America, the fundamentals do support another positive year, even after a huge 50 per cent rally from the summer lows.

If you're still a non-believer in 2011, consider that since 1940, the end of World War II, the third year in a president's term have been positive averaging a 19 per cent rise. Although there have been years where gains have been limited to 2-6 per cent, it does indicate that 2011, historically speaking, would be a low risk year with potentially great returns. Not only that, the last two years of a president's terms have outperformed the major stock markets.

Of course, all these almanacs, historical data, and predictions won't matter if America decides to dip back into a recession-like state and corporate earnings fall off the tracks. We'll have to wait 365 days to see what analysts were right.

Commodities

Don't think the commodity story ends in 2010. Gold, silver, oil, and copper have all had huge rallies leading into the new year and expect that trend to continue, at least for the first half of the year. Asia's continued economic rise, America's slow but surely recovery along with a falling US dollar bodes well for commodities. Gold and copper continue to reach all-time highs, as well as silver, notwithstanding the Hunt brothers and oil has reached multi-year highs.

Trading Ideas

If you're animate that this year will finish positive but don't know by how much, the best trade would have to be writing barely in-the-money puts. In-the-money puts would expire worthless if the market surges above strike prices, especially in an extremely bullish year. They would also lose significant value if the market's gains are tepid allowing traders to capture as much time value as possible.

Some January 2012 put options have huge premiums, allowing people to earn ten per cent for at-the-money options. Apple, trading at just under $330 today, have 330 puts worth $42 or more. If Apple fell to $289, you would still make money!

Personally, I've always believed writing puts are more efficient than buying stocks, especially if the stock does not pay a dividend. It requires zero dollars and equal or less margin too. Just remember that if you are assigned, you'll need to forfeit the cash or margin to cover the purchase.

With that said, I would like to wish all my readers a Happy New Year and good luck trading and investing.