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Recaping the 2011 stock market and reading the tea leaves for 2012

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2011 ended about where it began. That certainly does not tell the story of 2011. There will be those who can say while everyone else was freaking out with the volatility of step advances and declines the major averages ended the year with the Dow up a few points and the S&P 500 and NASDAQ down a fraction. Call it about even. So does that speak well of indexes and the old buy and hold approach to stocks? Absolutely not! Who in their right mind would want to ride that roller coaster and take on big paper losses at times to end up with a couple of points?

For some it’s the volatility in itself that was traded and potential gains whether realized or not were available. Finding relative strength (or weakness when the market was declining), among stocks did garner a performance that would have been unavailable in major indexes.

Anyone contemplating such a set it and forget it approach might consider how that would have worked in 2008; and how they might have been thinking when the USmarket was down 20% intra year. Near the bottom for the year there was news like the Arab Spring, the tsunami in Japan, and European debt problems continued to deteriorate.

There is nothing like educating yourself to make intelligent decisions on shorter time frame trades and investments than simply holding on and hoping. All readers of these articles have read ‘hope’ is not a strategy in the financial markets.

Although the stock market's performance this past year has been from year to year uneventful on an absolute basis; it has been performing on a relative basis. Among Europe's major markets Germany's DAX dropped more than 15% this year, France's CAC fell 17%, and Britain's FTSE finished the year nearly 6% below where it began. As for Asia's major averages, Japan's Nikkei descended 17% while Hong Kong's Hang Seng tumbled 20%.

Many may point to the stock markets poor performance against itself in 3d year presidential cycles pointing out that this should have been a high performance year. Then others will prefer to remark about the discord in Congress and partisan fighting as the political contribution to stock market returns this past year.

US financials as a sector were down about 17%. The ETF XLF that represents the financials is forming an asymmetrical triangle. Unfortunately from an investing standpoint this is not a very predictive chart pattern; as it is more dynamic, in that it can break out above or below the triangle. If the triangle pattern becomes tight towards the tip, it is said to have compression; and can break out in an explosive way so it is worth watching.

It is widely believed that the European situation is the biggest risk for 2012, but it may generally be factored in to market values barring some new twist. Other variables that are likely to play a part in market valuations and volatility include the trajectory of China’s economy, the political dynamics ahead of the 2012 U.S.presidential election, and geopolitical issues around the world.

So the good ol’ USA has not done all that bad if you consider all the variables. Will 2012 be the year things get back into gear and head back up? You won’t find the answer to that in this article; but day by day and week by week as the charts add more information many smart traders will be taking positions in that trend as it goes.

Here is some more detail on 2012.

China's PMI reported on Tuesday actually tipped back into expansion territory at 50.3 while the Eurozone PMI advanced up to 46.9 from 46.4. A number below 50 implies contraction, yet with all that was going on in December with respect to the sovereign debt crisis, any improvement from November qualifies as a welcome surprise.

In the U.S. the ISM Index for December released also on Tuesday was up and good. Factory Orders will be out Wednesday at 10AM ET, and the all important Jobless Claims on Thursday followed by the Employment Report of Friday.

On Tuesday Stocks started 2012 on a strong note by scoring its best session percentage move in a couple of weeks. The effort took the stock market to a two month closing high after gaping up at the opening over some serious overhead resistance and after some back and forth price action continued higher.

A lack of corporate news and domestic data ahead of the open left many market participants to take their cues from foreign averages; and the market abroad were backed by a manufacturing reading from China that suggested activity began to expand after it had contracted in the prior month. India also reported its best manufacturing reading in six months.

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