2012 was a continuation of a trend that became more evident in the last few years. We no longer seem to trade based on company performance or earnings outlook, but more and more on news driven headlines and unpredictable economic and political events. This kind of environment creates both challenges and opportunities for traders who are willing to think “outside the box.”
Here are ten Big Events that shaped a good deal of the markets’ movements in 2012 – and provide insight into what events will move the markets next year and what stocks might benefit.
#1 Lame Duck Congress
A funny thought, that, and many traders went earlier this year and again this fall lost a bunch of month in spurts throughout the year. I wrote a while ago this would not happen- and now that I have repeated myself don’t be surprised if that prediction is mistake number eleven by New Year’s Eve.
What does this mean? More uncertainty, less business investment than the norm and a recession, perhaps this quarter, definitely by next quarter. Tech spending will get hit first, so do not get suckered by the seemingly low prices for Dell (NASDAQ:DELL) or Hewlett Packard (NYSE:HPQ). Oh, and the Republicans lose control of the House in 2014.
#2 The Fiscal Cliff Debate
Goldman Sachs (NYSE:GS) said it best – if we go off the cliff, the Fed keeps things very liquid and markets stabilize or go up. And they did. Traders I know who went short believing that Congress could not agree on anything, got killed the past few weeks. You cannot fight the Fed and the Fed based liquidity killed the shorts.
What does this mean? No selloff in the markets regardless of how inept Speaker Boehner continues to be. Time to sell some puts, look for stocks with rich premiums like Apple (NASDAQ:AAPL) or Tiffany (NYSE:TIF).
#3 The Fed Renews QE, Twice
Ben Bernanke not once but twice put into place new liquidity measures that propped up or pushed up equity markets. What does this mean? A market downturn will be temporary if there is any downturn at all in 2013. Time to sell some long term puts — if you sell an Apple January 2014 $500 put now, you get a 13% plus return — and who would not want to own AAPL at $500?
#4 The Election
This was a near “funny” event for traders. It is always amusing to see traders think their own political wishes would come true if they just prayed hard enough to the gods of the market. I called the election in August – that Obama would win big, going away with the electoral college vote – it was pretty obvious by then.
What does this mean? More gridlock, what is called Obamacare is here to stay and the Republicans will spend all of 2013 paralyzing the country as they decide which way the party should turn. This instability will increase volatility, increasing the premiums for puts and calls. Start exploring weekly puts and calls, more than 175 stocks have them, great way to generate weekly income, the oil and service companies and drillers have been great for this strategy, look at Transocean (NYSE:RIG).
#5 The Greek Bailout
The eurozone members led by Germany fixed the debt problem, in Greece. Not really. Greece will eventually leave the Eurozone (I thought this might happen this year, hard to see it won’t happen next year).
What does this mean? A savage European recession, a hit to companies exposed to Europe and a banking crisis within two years or one day after Greece leaves the euro if they surprise people when they do so. European banks like Banco Santander (NYSE:SAN) could be one of the great short positions of the decade if you get your timing right.