I thought 2010 was a draining year, but I couldn't imagine a more frustrating year than 2011.  It is easy to forget all of the wild swings the market had in 2011.  With the help of the Trader's Blog we can see what was moving the market at the time (click on the links to read the related article).  It really shows how tough a year this has been for anybody trying to add value through Active Risk Management.

1. January 1 – February 18 [+5.6% in 34 days]:  With the Fed printing money, a new payroll tax cut, and a President & Congress promising action to spur the economy, the year starts out strong.

   ---

2. February 22 – March 16 [-6.4% in 17 days]:  “Arab Spring” begins with overthrow of Egyptian government causing fears of instability.

   ---

3. March 17 – April 29 [+8.5% in 31 days]:  Market rallies despite a barrage of negative news as big investors pour money into stocks.  Only pause in the rally was when a government shutdown loomed until Congress agreed in the 11^th hour to a “record” cut in spending.

   ---

4. May 2 – June 15 [-7.2% in 32 days]:  Fed Chairman calls economic slowdown “transitory”, inflation causes sharp drop in consumer confidence,  precious metal bubble bursts, problems in Europe surface again, and the EU implements the first of many can kicking “solutions”.

   ---

5. June 16 – July 7 [+6.9% in 15 days]:  After agreeing to cut spending and raise taxes, Greece receives commitment from the other EU countries to continue providing bailout money.

   ---

6. July 8 – August 8 [-17.3% in 22 days]:  The possibility that the US could default on its debt is raised as the Debt Ceiling Circus dominates the headlines.  During the 11^th hour Congress strikes a plan to kick the can down the road, but the lack of substantial cuts to the deficit results in the US losing its AAA credit rating.

   ---

7. August 9 – October 3 [-1.8% over 39 days]:  The market moves in wild swings.  16 of the 39 days involved moves of 2% or more, with 4 days showing moves greater than 4%.  The volatility is caused by fears of additional European failures, followed by rumors that a bailout was being planned, along with angst that the US economy was heading back towards recession.  (See SEM Economic Update:  What happened this summer? For more details)

   ---

8. October 4 – October 27 [+16.9% in 18 days]:  Market turns around on rumors of a bailout “bazooka” that is supposed to solve all of Europe’s problems.  The market has only moved this quickly 6 times during the last 60 years. 

   ---

9. October 28 – November 25 [-9.8% in 20 days]:  The plan that sparked the 20 day rally is officially announced and everyone realizes it is “long on words, short on details.”  New governments are put in place in Greece & Italy, but everyone realizes that simply putting in a new government will not fix the mess.  The Italian bond market begins to worry that Italy may not be able to pay back all of its debt.  The ratings agencies begin to comment on the impact the European crisis could have on US banks.

   ---

10. November 28 – December 7 [+8.8% in 8 days]:  The EU leaders again announce that they are ready to get serious about their debt crisis.  The Fed and other central banks announce a coordinated plan to help the Global Financial System.  Rumors also persist that the ECB and/or Fed are considering lending money to the IMF so they can in turn bailout the struggling EU countries.

    ---

11. December 8 – December 14 [-3.9% in 5 days]:  Despite another summit meeting, investors realize that nothing has changed in Europe.

12. ---

    December 15 – December 30 [+3.8% in 11 days]:  European Central Bank announces plans to buy bonds from member banks; US Congress reaches agreement to extend the payroll tax cut & extended unemployment benefits for 2 more months

When it was all said and done the market ended up almost exactly where it started the year.  I don't like making excuses, but if you look back at what was moving the market during the sell-offs and then what sparked the subsequent rallies, you can see that in the big picture NOTHING has changed.  2011 was disappointing and extremely frustrating.  In my 13 years at SEM we have never worked harder than we did last year.  We've dug deep into our trading systems looking for indications that something is broken.  We've studied the market to see if there has been a fundamental shift in the market.  We've looked at systems that did well last year to see how they would have done in past bear markets.  The bottom line is that in our opinion, it was just a very tough year that has been dominated by outside manipulation that cannot continue forever.

The year was volatile, but it has not been unprecedented.  The swings we saw in 2011 intra-day have been big, but there have been years with much higher volatility.

Most of the time when the market is going through these types of intra-day swings it is an indication of future problems ahead.  Wit the benefit of hindsight we could have just stuck with our bullish allocation we started the year with, but as we saw during some of the steep sell-offs in 2011 there is great potential that anybody not playing defense will regret giving up on active risk management.

The comments and posts published in the SEM Trader's Blog ARE NOT investment recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.

Investing in the stock or bond markets involves risk and may not be suitable for all investors.  Before making any investment decisions you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with your investments and seek advice from an independent financial advisor if you have any doubts.  All investments involve risk including those managed by Strategic Equity Management.

Opinions expressed at www.stratequity.com are those of the individual authors and do not necessarily represent the opinion of Strategic Equity Management or its management.  Any opinions, news, research, analysis, prices or other information contained on this website, by Strategic Equity Management, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. Strategic Equity Management will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

The use of this website constitutes acceptance of our user agreement.  Past performance is NOT indicative of future results.