Straits Times Index: Heading Towards a Pull Back in Feb and Then Onward to 3300 by May?

I believe in early 2012, most fund managers and analysts were so bearish that cash levels were very high. When the rally that began on 4 Oct began, only people who short lost money by short covering. This occurred between 4 Oct to 21 Oct. Corporate insiders also started to buy around late Oct and early Nov. In Nov, most short term chartists began to spot a short term trend change and started to long. The more conservative technicians only started to long when the monthly stochastics turned positive, which was in Nov, or the S&P500 breached the 200 day EMA in Dec.

The fundamentalists are always the latest to follow market trends. They wait for economic data to turn, which is always at least a month to 6 months late. They began to turn bullish in Jan 2012. Retail investors unfortunately began to turn NEUTRAL only now. Take note, they still have not turned bullish.

Now those who went long from Nov 2011 onward would have made 20% by now, entering when S&P500 was 1100, which is now 1350. Those who went long when the STI was 2650 would have made around 13%. They would have started to take some profits now. Hence I expect to see the first dip of around 5 - 10% starting around now until end of Feb.

I would take any dip as an opportunity to re enter. I am looking at STI level of around 2800; around a 7% dip. There will be one more leg up at least, with around 15 - 20% for the STI before we face another peak by May 2012.  What happens after that is unclear. I believe Marc Faber said that stocks may not do so well after May. I believe it won't crash either in 2012, at least until late 2012 or early 2013. That is when the music stops.

Nov 2012 is the US Presidential re-election. The Fed will pump as much liquidity as possible to prop up the economy and stock markets. The fact that the US TIPS breakeven dropped to around 2.1% from 2.5% is testament that inflation expectation is falling, and that the Fed is right that the 2 bouts of QE is not stoking inflation. More importantly, the Fed has room to launch the third QE.

The OECD CLI showed that the world's biggest economy (STILL!) is turning around after a scare in May 2011! However, China, the EU's indicators are still heading south. The CLI indicator is not always the lead indicator as it failed to lead the stock markets this time, but it confirms our suspicion that we may have averted yet another global recession.

Among the countries that have turned around are Japan, Russia and India! Perhaps it is time to buy these countries' ETFs and funds!

I met a friend from Turkey, who told me that the Greeks may riot with greater ferocity in the warmer seasons of spring and autumn. In the dead of winter, we already have 45,000 on the streets, attacking the parliament and theatres. If youth unemployment continues to climb and wages fall, we could see a full scale revolution in May. The Greek opposition leader said something that scared me a lot. He said that if the current Prime Minister concedes too much to the EU, he may lose the coming elections. When the opposition takes over and there's a good chance they will considering how the economy is in freefall, they will renegotiate all the agreements with EU. "When you owe the bank EUR500, you cannot sleep. But if you owe the bank EUR5 billion, the bank cannot sleep". They will use this lever to threaten the world. The world will tolerate Greece's uncontrolled spending until Germany eventually pulls the trigger and says, "enough is enough", and gives the lazy Greeks the red card out of Eurozone. This is the most probable scenario that will unravel in 2012 / 13.

Contrary to popular belief, I actually feel rather bullish about 2012 and don't think it will be as volatile as in 2012. Stock markets may just bob along until the end of 2012 before we see huge price actions... Hang on tight!