Looking at the Markets? Look Up!

2011 looks like it will be a great year in the markets.

While we are still very early in the first quarter, the S&P is already up 2.9%. And this is just after the fourth quarter of 2010, when the S&P rose 10.2%.

If history repeats itself, the stock market should have quite a year.

Right about now, the naysayers are starting to pounce on my words.

“The recovery is too slow,” I can hear them saying. “Unemployment is double-digits… bullish sentiment is way too high…”

I have to agree with their last point. The latest bullish sentiment reading from the American Association of Individual Investors is 52.3%. That is significantly above the long-term average of 39% and approaching a 5-year high. And the bearish reading is a full 7 points below its average of 30%.

Plain and simple, the market is very bullish.

And as the folks at Bespoke Investment Group point out, when the market gets this bullish it tends to underperform in the short term.

So why am I still bullish long-term?

A few reasons…

The January Effect

What the market does in January is often a very accurate indication of what’s to come.

This year, for example, the market rose for the first 5 trading days of January — something that has occurred 38 times in the past. In 33 of those instances (87%), the entire month ended with an up market.

And what the market does in January influences the rest of the year. According to the Stock Trader’s Almanac’s “January Barometer,” if the market is up in January, 90% of the time stocks will end the year up.

Wall Street

Wall Street, too, is expecting a lot from 2011.

Analysts at 12 of the Street’s biggest firms expect the market to climb 9% higher this year, according to a Bloomberg survey. Goldman Sachs, for example, accurately predicted 112.10% growth for the S&P in 2010. Goldman’s prediction for this year? 15.30%.

The “Presidential Cycle”

Adding fuel to the fire, this is the third year of the “presidential cycle”!

Five presidents have seen the Dow Jones Industrial Average rise by at least 35% in their first two years in office. (The Dow has gone up 41% since President Obama took office.)

For three of the previous four presidents, the third year was just as strong. The Dow returned an average of 31.3%.

The fourth president, Warren Harding, died in office during the fifth month of his third year (1923). The market was down 6.9% at the end of that year.

So the overall DJIA average for a president who saw 35%+ gains in his first two years of office has been 21.8% gains during his third year.

But this positive third year isn’t limited to that small group of presidents.

Since 1945, the third year of any presidential term has been very good for the markets.

The S&P has averaged a 17.13% gain without a single down year.

All historical indicators are pointing toward a very robust 2011 for the markets. If they hold true, investing in the S&P 500 this year could return between 9% and 17%.

That’s a great return.

But what if you are looking to outperform the markets?

History says to look at technology, consumer discretionary, and material stocks.

[Ed. Note: Christian Hill runs the Trend Trader portfolio for the Liberty Street League newsletter. He has identified at least 6 long-term trends that will shape the investing landscape for the next 10 years. His readers are already positioned to take advantage of those trends, and are seeing gains as high as 40% as we speak.]