Off to the Races for Stocks in 2012?

No surprises to yesterday’s rally. As we discussed yesterday, the market was very oversold with the major U.S. indices showing single-digit, 2-period RSI readings, combined with the year-end upward bias that is in place. The question now is whether or not the magical, year-end levitation act can continue for a few more days, giving the long-only mutual fund managers and the Obama administration a chance to brag about three consecutive years of positive stock market returns.

Bigger picture, if you add up all the things that went wrong this year, both economically and politically, the market should have been 25%-40% lower. The fact that it was able to sustain its current levels is a confirmation that the U.S. is flooded with cash (via the Fed) and the cash is finding its way into the stock market. Any resolution to the European situation and/or any economic pick-up in the U.S. economy has the potential to trigger a major upward move in equity prices in 2012. The continuation of printing money makes the world awash in cash and that cash is going to find a home somewhere. Right now, it looks like if Europe gets resolved, that home is going to be in equities, especially U.S. equities.

For 2012, we’ll continue to follow the signals and “see the trade, take the trade”. Eventually, if the above scenario is correct, everything will move above the 200-day moving average and long signals will follow quickly and continue to trigger throughout the year. As much as I (and most everyone who reads the Daily Battle Plan) dislikes the incessant government intervention, combined with an administration that thrives on dividing our nation with class warfare, higher stock prices are in everyone’s best interest.

Wealth creation is a very powerful force, especially if the wealth created touches the many as higher equity prices do within pensions funds, 401k plans, IRAs and the many retirement plans. Prices will ultimately dictate whether to trade on the long side or short side and right now, most everything is under its 200-day. A few good days/weeks of rallying though, will get many indices above the 200-day and it could then be off to the races. The fact that nearly no one is expecting this scenario makes it even more compelling as to why it has the potential to occur. So count me in among the very few who sees the high potential for a very large, bull market move in 2012 (and yes, I’m wired to see the glass half-full).

I want to wish you and your family happy holidays and I look forward to being back with you on the first day of trading in 2012!