Forecast Update on 6/20/2011

Forecast Update on 6/20/2011

Reasoning: Within a band of 1000 points, it seems the DJIA is more related to investors’ fears ands expectations, rather than objective micro- or macro-economic realities. What it seems to me now is that as the Dow approaches 13,000 investors panic and think the market is over-bought.

When it drops below 12,000 they reconsider because they feel it is under-valued. So it fluctuates in this range, until we get some “hard” news that changes the band. I don’t see any news that has not already been factored into the market. So it seems to me that it will continue to fluctuate between 12 and 13,000 - essentially.

But I adjusted that to 11,900 to 12,700 because I think 12,000 is a psychological bottom. But it has to drop BELOW it. Also I do not go as high as 13,000: I would stop at 12,700 because at 12,700, investors who are being optimistic in a rising market consider that to be, essentially 13,000. And they treat 12,700 as if it were 13,000.

So 12,700 becomes a psychological top. That’s it. I don’t see anything to change the original forecast of April 28 (indicated below).

Also the behavior seems to follow another pattern: it drops quickly and rises slowly. I am guessing, but it seems that the fast drops are due to fear/ panic. And after a sudden drop, then investors slowly “test the water” and cautiously buy back in.

So it seems there will be sudden drops (500 points in three days, for example) and slow, gradual rebuilding (for example, 500 points in three weeks with some fluctuations).

Today the market is cautiously rising above 12,000, after dropping to 11,900. I would guess it will do this for two more weeks until it recovers to 12,450. Then it will fluctuate around 12,450 for three weeks, then drop back as low as 12,100 before starting it steady rise back to 12,700.

Then there will be one more panic in 2011 back to 11,950 and end then, as predicted before at around 12,700 on December 31, 2011.

December is a year-end closing month (meaning accounting - closing the books and adding everything up). There is also Christmas holiday retail store figures plus a lot of taxes. Investors always wait until January 1 before they do anything. They are watching too much data coming in towards the end of December. Retail store sales for Christmas are always a big question: they are typically very high, compared to non-holiday sales. Plus the stores run a lot of sales. So the accounting is tricky. Nobody ever knows whether it will be a profitable holiday for the retail stores. We all just have to wait and see. So December becomes a “waiting” month: wait until the new year.

Then in January 2012, the market will “test out new highs”. That would mean that it will break through the 12,700 barrier and run up into the 13,000s. After exploring the 13,000s for a while, it will discover a new psychological “top”.

That could be as low as 13,100 or as high as 13,500. But the economic recovery will still not be on track yet nor very strong. So I predict 13,450 maximum. We have to remember another important factor here: the 2012 presidential elections.

Incumbent presidents always want things to SEEM LIKE THEY ARE GETTING BETTER just at the time they come up for re-election. And it does not matter how bad it has been: people lose perspective. So as long as things are improving, they stand the best chance of being re-elected for another term in office.

Since presidential advisers all know this behavioral pattern, they know they must obey it. It gives them an incentive to “dump” all the bad news they have into the markets during their first few years, so that things will be improving come re-election time. I think that may explain a lot of the situation we see now.

The executive office (president) will start “priming things up” very soon, and we will see what they call a real economic recovery begin to form. It will not be anything really dramatic, but it will be just enough to get Obama and his group re-elected.

Prediction: Obama re-elected in 2012 with 50.4 % of the popular vote. The Republican candidate will get 46.7 % of the popular vote. Obama will get 74 % of the electoral vote and most of the same states as he won in 2008.

Ohio is a “toss-up”. Obama has visited there 13 times already. He is campaigning hard for Ohio. It has high unemployment, a large population and is a “swing state”. It could go either way. Obama will win it given a “decent” economic recovery. He will lose it if the economy falls off track.