To recap an interesting 2011:

- Japan was hit by a devastating earthquake, endangering nuclear reactors.
- The U.S. government debt lost its AAA status according to S & P.
- The market endured a 22% correction with a few very scary 400-500 point down days
- Europe entered into severe recession due to a liquidity crisis and political uncertainty.
- China slowed down, putting downward pressure on commodity prices.
- The perception of gold and silver went from the ultimate safe haven status to unwanted assets, with gold having dropped over 25% this year.

Despite all the doom and gloom headlines something special happened - the stock market refused to crash. As a matter of fact by the end of the year it managed to finish at just about breakeven.  The reason for this recovery requires a closer look beyond the headlines.

- 2011 saw corporate earnings, profit margins, and cash levels continuing to expand and reaching record levels.
- US unemployment numbers are finally starting to improve (fell below 8% in December)
- Significant changes are being planned in Europe to resolve the crisis as soon as possible.

Definitely there are risks remaining in the market, especially out of Europe. however things are also getting better.

These 5% drops in the markets seem to now be the new normal.  Last week it seemed the market was stabilizing so I dipped my toes back in.  I was only about 50% long.  This week the market plunged after experiencing  poor earnings from technology titans Dell and HP along with poor economic data for manufacturing and jobless claims and continued concerns of bank failure in France.

In this environment when there is  even the slightest bit of selling there is all out panic in the markets because the memories of the 2008 crash are fresh in everyone’s minds. I am now positioning the portfolio to fully benefit from further drops in the market. Any continuation of the crash will be quite profitable for us.

Believe it or not, the scary part is that we still don’t have truly bad economic data being released yet.  So far we are only seeing poor confidence numbers and sovereign debt issues.

1.) Its scary to think what will happen to the market once the US jobs numbers actually turn negative.  Those numbers are currently quite poor, but still positive.

2.) What will happen to the markets once European or US GDP data finally reflects a recession?  Even though the markets are over 15% off their highs we are technically still not even in a recession.

3.) So far we have seen decent earnings numbers from Wall Street.  What will happen when poor earnings are actually released?  We saw this with HP and DELL this week – both companies lost over 10% of their stock values as a result.

4.)  Greece or Ireland defaulting is almost a certainty – what will happen to the markets when they do?

The announcement of any one of the above mentioned items can lead to another 20% drop in the markets. What does that mean for a market that is already so beaten down?  It means we are destined to test the 2008 stock market lows.

Fed chairman Ben Bernanke might announce some form of stimulus at his meeting next week.  I think that will only give us a short lived bounce which I have outlined above on the chart as #2. The final hope for the market is to find buyers willing to jump in around the 1,000 area on the S&P500 index and then it bounces up from there – don’t count on it.

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