DOW 11000 - Now What ?

Finally DOW reached and closed above 11000. I predicted this back in June. Even though my timing was off by about 3 weeks, my trend prediction was correct (which did help in my portfolio).

Now that DOW has crossed 11000 once more (it has crossed so many times in last 11 years) - what's in store for last quarter of 2010 ?

There are some interesting trends in market which are worth watching.

• Currencies: It is like race to the bottom. All countries are making all subtle and not-so-subtle efforts to make sure that their currencies are weakened so that they can grow by exporting to all other countries. This works only if one one or few countries do it. But if everyone does it, it's lose-lose situation unless we can find another planet to export to:-)
• Gold and commodities: Since all currencies are racing to the bottom, some folks are losing confidence in "fiat" money and instead putting their money in gold and other commodities essentially creating a "gold" currency. No wonder when US $ is 15 year low against yen, gold is at nearly all time high (not factoring in inflation)
• QE2:  This is like much awaited summer-time Hollywood sequel. Everybody knows when it is going to release and how it would be. Since Fed had given enough indications that it is considering QE2 - quantitative easing part II, markets have already priced it in terms of interest rates. That's why we have all-time lows on mortgage rates and yield on 10-year touched 2.33%
• Emerging Markets Equities and Bonds: These are the only countries where meaningful economic grown would be seen in 2010 and 2011 (above 5%) and these countries have learned from past mistakes. Hence many markets like India, Indonesia etc are near all time highs
• Corporate Earnings:  Going by Alcoa's earnings reports, overall corporate earnings are going to be pretty good since companies have been slow in hiring and capital expenditure due to lack of conviction in economy growing. So any revenue growth due to Emerging markets is directly reflecting in profits. So in summary earnings season should be good if not great !

So what should a normal investor like our self do ? Here are some predictions for us to navigate through these waters:

• DOW would close around 11500 and S&P around 1200 by year end. This means there is about 3-4% return remaining from now till year end. Not bad for 3 months !
• Sectors which are sensitive to elections would be best performing sectors. For example: energy sector, for-profit education sector, mortgage insurance sector, finance/banking sector and health care sector
• Here are two recommendations for this week: PMI at $4 and RDN at $8.20. Since housing market has stopped its slide, it's bound to recover at some point (two of my friends just bought houses after long-time) which should help these mortgage insurance companies. These could return 50% in 2 years.

That's all for now. Have a great week !

/Shyam