Opportunities On Both The Long And Short Sides Of 2012

By John Nyaradi

January is the season for crystal balls and for stock market and ETF fortune tellers to make predictions for the coming year. As 2012 dawns, the air is filled with stock market forecasts and prognostications, and while no one has a crystal ball, clear themes are already emerging for the New Year.

Will there be QE3? Will Europe implode? How will the Presidential election affect global markets?

I expect 2012 to be volatile but, as always, there will be opportunity in exchange traded funds (ETFs) for investors who are alert and have a plan. Here are several factors I’m watching as we head into the New Year:

The situation in Europe will likely continue being a major player in 2012. The struggles over sovereign debt and how the EU handles this will have a major impact (for better or worse) on global markets in 2012.

Will interest rates rise or fall? If growth stays low, we can expect more action on the part of the Federal Reserve and we’ve already seen pressure in recent days to help the housing market. If growth picks up, we can expect rates to rise and that could put a huge damper on U.S. corporate profits, the housing markets and the ability of the country to finance its growing debt, along with more stress on Europe.

The rising price of oil and gasoline becomes a major drag on the economy as oil crosses $100/bbl. Geopolitical concerns could continue to be a factor as Iran goes nose to nose with Europe and the United States and the Arab world continues to fester.

The outcome of the Congressional and Presidential elections will cast a major shadow across the domestic and global financial landscape.

The housing industry continues to languish. Again, action by the White House, Congress or the Federal Reserve on this front could create pivotal points in this critical sector in 2012.

Unemployment remains stubbornly high. The best forecasts are for stubbornly slow declines in unemployment which will continue to hamper growth and overall financial well being for the United States.

The potential default crisis for states and municipalities as they grapple with lower tax revenues and continue shedding jobs.

A slowing Chinese and European economy. Both of these regions appear to be on the cusp of recession and any sort of significant slowdown here will likely reverberate onto our shores.

Overall, I believe that 2012 will be another choppy ride as global economies continue to struggle with too much debt and the fallout of the financial crisis that started more than three long years ago. The most likely scenario for 2012 is that it will be another year when investors will have to look for powerful sectors, be traders rather than investors, and that we’ll most likely continue to experience ongoing volatility which seems to have become the norm.

I believe that ETFs will continue to provide opportunity in sectors like volatility, emerging markets, precious metals and interest rates.

Particular ETFs I’ll be watching are:

iPath VIX Short Term Futures ETN (VXX): this ETN offers exposure to the VIX, the CBOE Options Exchange Market Volatility Index, a measure of the implied volatility of S&P 500 index options, oftentimes referred to as the “fear” indicator. If 2012 is going to be volatile, volatility will offer opportunity, both on the long and short side.

iShares MSCI Emerging Market Index (EEM): if global growth returns in 2012, emerging markets will likely again be at the forefront and outpace growth in developed nations. If recession returns, emerging markets will likely lead the way down. Either “long” or “short” it’s likely that emerging markets will outperform.

iShares Barclays 20+ Year Treasury Bond (TLT): the million dollar question for 2012 is which way will interest rates go? Will the Fed launch QE3? Will the “bond vigilantes” force higher interest rates as nations struggle with too much sovereign debt? The “long” bond will be the most volatile in either scenario and so could offer profit potential in either a rising or falling interest rate environment.

SPDR Gold Trust ETF (GLD) is the second largest ETF after (SPY) which tracks the S&P 500. Widespread interest in gold will probably be the standard for 2012 as investors guage the future of paper currencies, inflation and national defaults. Gold has been in a long term, multi-year bull market and the recent correction has triggered an active debate about whether or not the bull has died. As always, gold will likely continue to be volatile and for traders/investors with a plan, volatility offers potential.

iShares Silver Trust ETF (SLV): “poor man’s gold” will continue to attract interest as it combines the elements of a precious and industrial metal. Currently in a bear market and 40% off its recent peak price, silver could offer a wild ride for 2012.

Bottom line: Opportunities are likely to be found on both the “long” and “short” side of every market in 2012. My approach to the New Year will be one of caution and to seek profits no matter in which direction the markets may take us. No one has a crystal ball and no one can predict the future, however, the one certainty is that opportunities will abound. As famed investor J.P. Morgan said, “The markets will fluctuate.”

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time. Wall Street Sector Selector currently holds positions in EEM, XIV.