This week is again shortened, with markets closed today in lieu of New Year’s Day. I hope you all had a very enjoyable holiday and are ready, like me, to make 2012 a great year. (I don’t believe it will be our last!)

The stock market turned in a positive performance for the last week of the year, up 0.53%. That may be reassuring, but it does little for investors who have been in the market since the beginning of the year. The final tally for the stock market in 2011 was a drop of 10.7%. While investors seemed optimistic early on in the year, the European crisis seemed to dominate the news and outlook during the majority of the year. That produced uncertainty, the only explanation I can think of for markets to remain depressed.

The stock market appears even more undervalued than at any time during the past three months. Corporate earnings continue to improve, the P/E ratio of the market as a whole has moved under 15 and the current yield of the market is almost 3%. The range of my fair value estimate is from 10,089 to 16,889. Taking the mid-range estimate of fair value, the market appears to be a little over 8.6% undervalued.

But that doesn’t necessarily mean it’s time to invest in stocks. Bonds have maintained positive momentum, while stocks continue to struggle. My momentum reading for stocks will improve when the strong stock levels of 200 days ago recede into the past. That will take at least a month, more likely three months.

Despite the weakness of stocks in general, real estate stocks (XRE) continue to show positive momentum greater than that of other asset classes. I will continue to own XRE over the coming week.

Market Outlook January 2, 2012

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