Welcome to a New Year.

The year 2011 has been difficult for traders as well as investors. investor saw significant erosion in values of their portfolios, while fresh opportunities for investing were absent. For traders, the year saw a series of small trends interrupted by counter trend moves. Small trends are difficult to make money. What then is the possible scenario for the New Year – 2012? When we look at long term charts of the Nifty, we see the scope for further declines. While markets will do what they will do, it does appear that the recent low of 4530 may not be the final low of this bear market. At some point, the markets will bottom out. But, that point is not within sight.

This is what 2012 could look like:

Trading will continue to attract the best minds in business, because of the intellectual challenges, mental satisfaction and independence that the profession offers.

Markets will bottom out in 2012, after which a new bull market will start that may last for several years.

High Frequency Trading Systems will dominate scalping, but individual traders will dominate all other time frames including swing trading which lasts for a few hours to few days.

A number of stocks will never revive from their bear market.

Gold will continue to be in a bull market after a deep correction, while silver bulls may remain disappointed during the year.

Are cash stocks bottoming out?

Any number of small cap and mid cap stocks have seen catastrophic losses. A question crops up: have these stocks seen their worst? VIP Inds has fallen from a high of 205 to a low of 73.5 in 4 months. GMR infra has fallen from a high of 94.75 to a low of 17.4 in 30 months. Titan has fallen from a high of 238 to a low of 154 in 4 months. Suzlon has fallen from a high of 145 to a low of 17.45 in 30 months. Similar stories can be repeated for many other mid cap / small cap stocks.

The question comes up: have these stocks seen their worst? Are they ready for a rebound now?

My Notes:
The bottoming out process in share prices is fairly easy to determine. Prices stop falling. A small rally comes about. The test of a bottom comes when a new decline starts which does not make new lows. This is the first sign that prices may have bottomed out. Smart traders can begin accumulation even before the last high is crossed.

We have started seeing small rallies in many beaten down stocks. These rallies will be followed by declines which should not make new lows. That will be the first sign of bottoming out.

Some fundamental inputs are required to ensure that we do not land up buying poor quality stocks. Many of the current fallen angels will never go up. Thus, I always stay with the blue chips. This is a decision that each investor must take on his/her own judgement.