Stock Market Outlook for 2012

We are entering the twelfth year of the secular bear market in stocks that began in 2000. Unlike the previous bear market during the 1970s, this secular downtrend is being accompanied by a structural deleveraging process, so it will likely extend until at least the end of this decade.

Our Secular Trend Score issued a sell signal in late 1999, indicating that the secular bull market from the early 1980s was about to terminate. As expected, a new bear market began in 2000 and the secular downtrend has exhibited typical price behavior during the last 12 years. The cyclical downtrend that began in late 2007 accelerated into a true market crash in 2008, beginning a period of heightened long-term volatility that continues today. The cyclical bull market that began in March 2009 has a current duration of 34 months and the monthly breakdown that occurred in August 2011 indicates that a cyclical bear market likely began in May 2011, although we have yet to receive final confirmation of that development.

However, even if the cyclical bull market from 2009 is still in progress, cyclical uptrends have an average duration of only 33 months when they occur during secular downtrends, so probabilities favor additional weakness before the next cyclical bottom forms. With respect to cycle analysis, the window during which the next Long-Term Cycle Low (LTCL) is likely to develop is from September 2012 to February 2013 and it is likely that the next cyclical bottom will form sometime during that time period.

The start of a cyclical downtrend in May 2011 would be confirmed by an annual cycle translation change in early 2012. If the rally phase of the current annual cycle from October fails to move well above the Annual Cycle High (ACH) in 2011, a transition to left translation would be signaled and a return to the October low would be forecast. Only a strong move well above the long-term high in April 2011 would reconfirm the cyclical bull market from early 2009, but that scenario remains highly unlikely at the moment.

Overall, given the current states of the secular and cyclical trends, our models project another volatile year of violent price swings. The S&P 500 index will likely produce a loss for the year, the magnitude of which will depend upon the character of the developing cyclical bear market. A strong cyclical decline would likely result in an annual loss in the 20% to 30% range, while a weak bear market that develops into a sideways consolidation formation would likely produce an annual decline in the 10% to 15% range. In either event, the investment outlook for stocks remains poor and our model portfolio will maintain a fully defensive alignment until the next cyclical bottom forms. However, the persistent volatility will almost certainly provide many excellent trading opportunities as the market lurches violently higher and lower throughout the year. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers.