ETF Review and Outlook
for
DIA, SPY and QQQ
A review of the top
index funds sets the stage for an orderly approach to forecasting and investing in the stock market. For this purpose, the prime vehicles lie in the exchange traded funds for the leading benchmarks in the form of the Dow Jones Industrial Average of 30 giants, the S&P index of 500 heavyweights, and the Nasdaq index of 100 stalwarts. The tracking vehicles for these yardsticks are found in DIA, SPY and QQQ respectively.
By contrast to popular perception, the real and financial markets are intertwined not only in the future but also the present which in turn springs from the past. Given this backdrop, the adroit planner surveys the landmarks in the backward direction as well as the conditions in the current environment.
Moreover the outlook over the months to come depends not only on the winds in motion at this stage but also the waves taking shape for the following year. For this reason the forecast at hand draws partly on, and sketches out, the prospects for 2013 and further beyond.
From a practical stance, the companies listed in the stock market earn their living within the economy at large. That much is true even in the case of virtual outfits such as online retailers and brokerage firms. As a result, the aggregate level of economic output plays a vital role in the turnout of profits and thus the status of the equities listed on the bourse.
In terms of recent trends, the conditions in the marketplace have not changed a great deal over the past few years. On the downside, the politicians of the West have gone out of their way to solidify the distortions in the housing sector in the wake of the financial crisis of 2008.
Another boondoggle involved the prop-up of some of the biggest and most unproductive firms in the economy. For this purpose, trillions of dollars were wasted in the form of bailouts for a gaggle of pulped banks.
To make matters worse, the struts put in place have prevented the property market from shedding the mountain of blubber it accumulated during the manic bubble in real estate prior to the financial blowup. For this reason, the growth rate for the entire economy is destined to be measly well into the 2020s.
On a positive note, however, the slowdown in China appears to have run its course for now. As a result, the Middle Kingdom will contribute more to the progress of the world economy in 2013 than it did last year.
In line with earlier remarks, though, the prospects for the industrial nations are tepid at best. In that case, the emerging countries of the world will have to plod along amid the general weakness in the global marketplace.
In short, the outlook for the real economy has improved a tad since the same time last year. In particular, we can expect the rich nations of the world to putter along and make way by about 2 percent after adjusting for inflation based on official figures published by government agencies.
In gauging the standard of living, however, the upturn in economic output ought to take account of the growth of the population due to net immigration into the wealthy countries. To this end, a representative figure is an increase in head count of 1 percent a year for the U.S. as well as a raft of other countries. In that case, the gain in real output per person comes out to a mere 1 percent or so.
By contrast, feisty countries such as China and India should fare much better. For the spearheads, a ballpark figure involves an advance of 8 percent or so over the course of 2013.
Thanks to the patchy but improving conditions in the global economy, the stock market is poised to climb higher as well. The cheery outlook shows up in the upward slant of the top index funds over the course of the year.
Looking downrange, the next milestone for DIA (also known as the Diamonds) lies at a price of $140.71 per share. The latter landmark is likely to be reached by the middle of the year.
After that stage, DIA will fall back toward its previous peak at the $135 level. Then the index fund is slated to touch the subsequent milepost of $145 by the end of this year.
At the close of 2012, the Diamonds wound up at a price of $130.58. By comparison, the first checkpoint going forward – at $140.71 – lies some 7.8% higher than the year-end value.
Meanwhile the second peak at $145 stands 11.0% beyond the terminal price for 2012. After that stage, the index fund is apt to fall back toward its previous summit.
A wrinkle in the forecast stems from the behavior of SPY (alias Spyders). If the latter vehicle breaks out into virgin terrain, then the Diamonds will naturally follow suit. In this way, the next big move for DIA depends in part on the turnout for SPY.
On one hand, the Spyders are bound to spin their wheels at a historical boundary marked by a chain of prior peaks stretching back to the turn of the millennium. Even so, the index fund will pull free of the quagmire at some point. When the Spyders move beyond the watershed in a decisive fashion, the Diamonds will celebrate the event with a similar thrust.
Over the near range, the first peak for SPY will occur at a price of $155. The latter landmark stands 8.8% beyond the closing level for 2012. The upcoming threshold could well be reached by the summer this year.
After touching this barrier, the index fund will stall and stumble back toward the $147 zone. There it will likely flounder for a few months at least.
The outpost in the $155 zone poses a major block to further progress. As noted earlier, the reason lies in a series of historical peaks at that level. As an example, the Spyders hit a price of $155.53 in July 2007 followed by $157.52 just three months later. The story is similar for a crest at $155.75 in March 2000, followed by an echo of $153.59 half a year onward.
In general, it takes about 3 attempts for a financial vehicle to surmount a newfound peak. As it happens, SPY is now approaching the hulking barrier for the fifth time. On the surface, then, the market is long due for a breakthrough based on its habitual behavior.
On the glum side, though, the highs in 2000 were scaled in the midst of a humongous bubble in the stock market. Although the uproar pumped up the Nasdaq market the most, the frenzy infected every patch of the financial forum as well as the real economy. In a comparable way, the zenith reached by SPY in 2007 arose at the height of the greatest bubble in real estate in modern history.
Given this background, the peaks attained during the sprees of excess since the turn of the century were extreme as well as premature. In other words, we are now approaching the lofty heights at $155 in a sober way for only the first time.
For this reason, the path forward is likely to be rocky as well as slippery. More precisely, SPY is bound to advance and retreat several times before leaving the $155 threshold for good. In this way, the market will thrash around for many months – or more likely a few years – after its next entry into the recurrent zone.
At this stage, we should note that the setup is comparable for the Diamonds. More precisely, DIA will go nowhere fast while SPY flails around at the $155 roadblock.
When the barricade is breached, the next milepost for the Spyders lies in the neighborhood of $170. The latter landmark towers 19.4% beyond the closing value of $142.41 at the end of 2012.
On a negative note, though, the Spyders will be hard-pressed to reach the soaring target this year. Instead, the index fund might have to wait another year or so before attaining the objective.
By contrast to the labored progress of the Spyders and Diamonds, the outlook differs somewhat for QQQ (a.k.a. the Qubes). The Nasdaq fund has a long way to go before it regains its prior peak at the height of the Internet craze.
At the end of 2013, the index fund wrapped up the year at a price of $65.13. The latter figure is a far cry from the apex of $232.88 touched in March 2000.
On one hand, the latter landmark was attained in the throes of the Internet craze. At the time, the deluge of hype and hysteria in the stock market bore scant resemblance to the actual prospects in the real world by way of digital technology and its applications.
Even so, the mad dash to airy heights during the cyber spree has left a lasting imprint. Despite the unhealthy nature of the ascent, the prior spurt has smoothed the way for a fresh stab at scaling the alps.
For this reason, the Qubes will likely trudge ahead even as the Spyders and Diamonds flop around near their respective thresholds over the next couple of years. In other words, QQQ should clamber upward in fits and starts throughout the slippy period when SPY and DIA keep sliding back toward their historical peaks.
The first milestone for the Qubes lies at a price of $73. This target, which stands 12.1% above the closing value for 2012, could be grasped by the summer this year.
The next milepost for the index fund crops up at the $78 level. The objective hovers 19.8% beyond the terminal value for 2012. On a negative note, though, the landmark might not be reached until the turn of the year.
In these ways, the trinity of index funds for the U.S. bourse will tramp onward and upward through a series of zigzags as usual. The story will unfold in a similar fashion for the other stock markets round the world. On the whole, we can expect the bourses of the budding regions to advance roughly twice as much as the Diamonds or Spyders. An an example, a gain of 11% for DIA should produce an uplift of 22% or so for the emerging markets.
NOTE: The full report is a document in PDF form. The publication, titled “Forecast of Top Index Funds for Investing in the Stock Market”, may be viewed or downloaded
here.
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