Year-End Zigzag Reflects Confused Sentiment

Off 140 points Wednesday and up 136 points the very next day? Does the poor old
Dow have any idea where its headed? The fact is, the market indexes, with their
flailing and floundering, are simply reflecting how most investors feel these
days: confused. The confusion, of course, stems from the news flow. Some of the
information were receiving looks fairly encouraging. Corporate America will post
record profits yep, an all-time high in 2011. Fewer people are signing up for
unemployment insurance. (The four-week count of first-time claims for jobless
aid just fell to its lowest reading since June 2008.) So we can infer that the
economys job engine is revving up a bit. And yet, Europe continues to send out
distress signals. Italys latest bond auction yesterday produced mediocre
results, pushing the yield on the benchmark 10-year Italian bond back above the
SOS level of 7%. Moreover, it appears that the European Central Banks
money-pumping efforts this month havent done much to cool investor fears about
the solvency of the continents banks. Two-year euro swap spreads , which measure
the difference in yields between bank and government debt, have soared in recent
weeks to the highest level since November 2008. In other words, the risk of a
Lehman-type event in Europe, with repercussions around the world, is getting
uncomfortably high. Perhaps turning over a new calendar leaf will ease some of
the tensions on the other side of the Atlantic. However, I wouldnt bet my bottom
dollar (or euro) on it. Hope for the best, but prepare for a range of possible
outcomes. Yesterdays mid-session turnaround for gold and the mining shares is a
favorable omen for the broader precious-metals complex. Below $1,530 an ounce ,
gold drew bargain hunters out of the woodwork much as the S&P did in early
October when it briefly dipped below 1100. I cant promise you that the Midas
metal wont revisit yesterdays lows again, or perhaps even penetrate them by a
modest amount. It appears, though, that gold is finding good support in this
neighborhood. So, make sure to stock up on Barrick Gold (NYSE: ABX ) below and
Newmont Mining (NYSE: NEM ) before they go any higher. In one of Thursdays
sillier developments, homebuilder stocks jumped on a report from the National
Association of Realtors that pending home sales rose 7.3% in November. Recall,
this is the same trade organization that just last week revised (downward) its
estimate of existing-home sales for 2007 to 2010 by a massive 740,000 units.
Given the widespread weakness in home prices, I would be skeptical of this
latest NAR number. It, too, may be reduced significantly in the months ahead.
Speculators can look to short homebuilders Lennar (NYSE: LEN ) and, especially,
Pulte Group (NYSE: PHM ). Of the two, Pulte clearly has the weaker balance sheet
and thus, probably, the greater downside potential. Set a stop 15% above your
entry point. A happy and prosperous New Year to you and those you love!