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Q1 2012: The Safest Places to Invest

2012 Stock Market Outlook

Written by Brian Hicks
Posted December 22, 2011

Congratulations! You made it...

After a year of extreme volatility and excessive whipsaw action, you made it through 2011 with us — with profits in hand.

The same can't be said for some of the "greatest minds" on Wall Street, our competitors, brokers, financial "experts" and hedge fund managers still apologizing for an appalling money-losing year.

Just one look at this Zero Hedge chart is painful proof:

2011 forecasts

Even as you read about the Fed pumping billions more into global economies, the death of Osama and Kim Jong-Il, Europe's credit nightmare, imbecilic actions in D.C., stupidity on trading room floors, the arrest of Bernie Madoff, euro fumblings...

Even as you watched Japan get rocked by earthquakes and tsunamis of epic proportions, the Arab Spring, the EU fiscal crisis, the toppling of Gadhafi, the fiscal showdowns in Congress, and the Occupy Wall Street protests...

Despite a 72-day Kardashian marriage, Schwarzenegger's infidelity, and Oprah's final season...

You did well with us.

While next year will be even better, what'll actually happen is anyone's best guess...

Fortune Telling

I'll be the first to admit I have no idea what will come to pass in the New Year.

It's hard enough to make sense of the markets, let alone forecast what will happen in 2012, given the world is supposedly coming to an end next December.

It's true we made some accurate predictions this past year: In 2011, we said gold would rally beyond $1,500, and that silver would break $30.

We accurately predicted $100+ oil... We foresaw rare earth prices skyrocketing... We explained why housing and unemployment wouldn't recover much...

When Main Street has just about given up on Wall Street, withdrawing billions of dollars — who's to say what'll happen in the year ahead?

But hey, I'll give it my best shot.

Here are some predictions for 2012:

  • $2,000 gold, $40 silver, and $150 oil on any Strait of Hormuz disruptions;

  • No recovery for housing;

  • The euro will finally fail;

  • The Dow will test 9,500;

  • Israel will attack Iran;

  • Natural gas will fall to historic lows on the Marcellus Shale finds;

  • The Great Depression 2.0 and/or the Great Revolution of 2012 will hit as Americans become even more disgruntled over the deceptions of Wall Street;

  • Facebook will withdraw its IPO based on the performance of other social networking IPOs;

  • Rare earth prices will run up again, as China just barred the world's largest rare earths producer, Baotou Steel, from exporting due to “environmental concerns” (Baotou accounts for just about half of the world's rare earth production, and was excluded from the Chinese Ministry of Commerce's list of 11 approved exporters for next year); and

  • Peak Oil deniers will finally understand what Peak Oil really is.

2012 Dogs of the Dow

Also, we can expect investors to invest in the Dogs of the Dow, yet again. Investors buy the 10 Dow stocks with the highest dividend yields, cash out by the next year's end, and repeat.

In practice, the theory isn't too shabby...

  • In 1996, they were up 29%.

  • In 1997, they were up 22%.

  • In 1998, they ran up 11%

  • And in 1999, they ran up another 4%.

  • In 2000, they were up 6.4%.

  • In 2001, they were down 5% and down another 9% in 2002 — both of which still outperformed the major indices in tough market times.

  • Despite the bear market of 2000 to 2002, Dogs of the Dow raced 29% higher in 2003.

  • By 2004, they ran up 4.4%, giving back 5% by 2005.

  • By 2006, Dogs of the Dow ran up 30.3%.

  • In 2007, the Dogs came in with flat returns.

  • In 2008, they fell 38.8% as compared to the Dow's 31.9% loss.

  • In 2009, they flew 16.9% higher, as compared to the Dow's 22.7% rise.

  • For 2010, the Dogs were up about 14% vs. an 18% rise in the Dow.

  • And so far, 2011 Dogs of the Dow are underperforming.

The logic behind this investment strategy is this: When you buy these stocks with the highest yields, you're buying the high-quality companies that are out of favor on Wall Street — which makes them bargains.

We'll have the full lists of the “Dogs” shortly.

But if you want to make some good money in 2012, there is a simpler way...

Wanted: 2011's Worst Performing Stocks

This is what's referred to as the famed "January Effect."

Investors who bought 2010's worst performers profited in 2011 from their bargain buys:

  • Weyerhauser (WY) basically flat-lined at $16 in 2010, including a drop from $19 to $12 midyear. But in 2011, the stock ran from a low of $16 to more than $24.

  • Dean Foods (DF) fell from $18 to $7 in 2010. In 2011, it ran from $7 to $14.

  • H&R Block (HRB) fell from $23 to $10 in 2010. In 2011, it ran from $10 to $18.

  • Comstock Resources (CRK) fell from $45 to $20 in 2010. It recovered from $25 to $32 in 2011.

  • And Apollo Group (APOL) fell from $65 to $35 in 2010. It ran from $35 to $55 in 2011.

Will this strategy work 100% of the time?

Of course not. Nothing has 100% success. If it did, we'd all be multi-billionaires.

But I've used this strategy successfully for years. (One year, I went 18 for 20 with an average gain of 85%.)

You're simply betting that the worst performers from the year before will be picked up as bargains in the following year.

So buy some of the worst performers and hold them for a year.

Keep in mind, we're not buying Citigroup or other pitiful stock names; we're buying solid names that will be around for a while.

As for 2011's worst performers, we're taking a look at Monster Worldwide (MWW), Alpha Natural Resources (ANR,) and Genworth Financial (GNW) so far.

Netflix (NFLX), as far as I'm concerned, will slip even lower.

One of the best ways to trade these beaten-up stocks is to buy long-dated options and/or the underlying stock, too. We're looking to play them in Options Trading Pit shortly.

Have a happy, healthy holiday — and a profitable 2012,

Stay Ahead of the Herd,

Ian Cooper Signature

Ian Cooper

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Ian Cooper has been trading stocks and options for 12 years. He contributes options, stock, and energy commentary to Wealth Daily, Wealth Wire, and Options Trading Pit. He's the Coach behind Options Trading Coach, a beginner's guide on how to trade options. Ian teaches thousands of loyal subscribers the many ways to be profitable from options rather than simply buying stocks alone. For more about Ian, take look at his editor's page.

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