Forecast of Top Index Funds for Investing in the Stock Market

Outlook in 2013 for the Grand Trinity of Exchange Traded Funds: DIA, SPY and QQQ

A Market Brief
by

Steven Kim

MintKit Investing
www.mintkit.com

Disclaimer This brief is provided as a resource for information and education. The contents reflect personal views and should not be construed as recommendations to any investor in particular. Each investor has to conduct due diligence and design an agenda tailored to individual circumstances.

2013 MintKit.com

Short Summary
A rundown of the top index funds sets the stage for an orderly approach to forecasting and investing in the stock market. As a backdrop, the leading benchmarks of the bourse are found in the Dow Jones Industrial Average, the S&P index of 500 giants, and the Nasdaq index of 100 heavyweights. For these yardsticks, the tracking vehicles take the form of DIA, SPY and QQQ respectively. The major milestones and likely moves for the exchange traded funds are sketched out for the current year and beyond.

Extended Summary
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. 4

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. 6

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. 7

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. * * * Keywords: Forecast, Stocks, Financial, Markets, Economy, Investing, Investment, ETF, Exchange Traded Funds, Outlook, DIA, SPY, QQQ, Nasdaq, USA, China, India

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A comparison of the top index funds lays the groundwork for a cogent approach to investing in the stock market. For this purpose, the first step is to line up the leading benchmarks of the bourse; namely, the Dow Jones Industrial Average, the Standard & Poors Index of 500 titans, and the Nasdaq index of 100 heavyweights. From a practical stance, the companies listed in the stock market earn their living within the larger economy. That much is true even in the case of virtual outfits such as online retailers, brokerage houses, and mutual funds. Regardless of the industry, the aggregate level of economic activity plays a vital role in the prospects for earnings and thus the fortunes of the equities listed on the bourse. In terms of recent trends, the outlook for the marketplace as a whole has not changed a great deal over the past few years. A major cause of stagnation lies in the stumbling blocks thrown up by a raft of governments round the world in the wake of the financial crisis of 2008. Since the financial bustup along with the Great Recession, the politicians of the West have gone out of their way to buttress the deformations in the housing sector. A second, and related, boondoggle lay in the prop-up some of the biggest and most unproductive firms in the economy. In the process, trillions of dollars were wasted in the form of bailouts for a gang of oversized banks. The insolvent outfits were the very clods that had fomented the financial crisis to begin with, then had fallen on their own swords after gorging on mounds of mortgage-based assets. To make matters worse, the struts put in place have prevented the property market from casting off the mountain of blubber it accumulated during the gross bubble in real estate 9

prior to the financial fiasco. Under normal conditions, the housing sector is a prime engine of growth for the economy at large. Unfortunately, the cadre of misguided politicos have thrown up a pile of fetters desgined to support the property market. As a result, the hobbled niche has been unable to shed the grotesque flab it accumulated during the runup to the financial blowout. Not surprisingly, the economy at large has been unable to toss off the deadweight and recover its vitality. For this reason, the growth rate will remain stunted well into the 2020s. Needless to say, the outlook for the year to come reflects the frail health of the blighted economies. As a direct offshoot, the volume of output will scarcely budge from the blunted levels seen in 2012. On a positive note, though, the slowdown in China appears to have run its course for now. In that case, the Middle Kingdom will contribute more to the expansion of the global economy in 2013 than it did last year. In line with earlier remarks, however, the prospects for the industrial nations are mediocre at best. In that case, the emerging regions of the world will have to plod along amid the general weakness in the global marketplace. To recap, the outlook for the world economy has improved slightly 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 into account the growth of the population due to net immigration into the wealthy countries. In this light, a representative figure is a rise in head count of roughly 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.

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On the upside, the feisty nations of the world are poised to fare much better. A case in point is China or India, which should advance by 8 percent or thereabouts over the course of 2013. Thanks to the upturn in the real economy, however feeble, the stock market is slated to follow suit. The cheery outlook shows up in the upward slant of the top index funds over the course of the year. In the sections to come, we begin with a backward look at our forecasts from last year. A welter of predictions turned out pretty much as envisioned, while at least one relating to the equity market in emerging regions was somewhat off the mark. Our second task is to examine the outlook for the real economy over the near term. The realm of tangible goods and services serves as the background against which the vehicles in the financial forum play out their sundry roles. A third item involves a quick survey of the history and nature of the leading benchmarks of the stock market. A couple of yardsticks have established themselves as household names while certiain other gauges are less familiar to the general public. The fourth aim is to examine the prospects for the index funds that track the leading benchmarks of the stock market. In particular, the forecasts sketch out the likely pathways over the course of this year and beyond. The last section talks about the dangers of patchy and faulty information in the realm of exchange traded funds. In a field racked by rapid change, the canny actor has to take extra steps in order to scrounge up a trusty batch of data to support a cogent program of investment.

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Hits and Misses over the Past Year

A year ago, we made a batch of forecasts over the span of a year and longer regarding the global economy and the financial markets. On one hand, the accuracy of the longish predictions remains to be seen. On the other hand, we can review the outcome for the year-long predictions. Taken as a whole, the bodements turned out to be mostly right and slightly wrong. For starters, the forecasts of the real economy were pretty much on track. To put things in context, the crash of the stock market in the autumn of 2011 portrayed the fears of the investing public regarding an imminent recession in the U.S. along with the world at large. Despite the jangle of nerves at the time, however, the real economy performed largely as we presaged. As an example, our growth forecast of some 2% for the U.S. economy turned out to jive with the preliminary estimate of 2.1% announced by the World Bank (World, 2013). For the planet as a whole, we envisioned a growth rate of more than 3% over the course of 2012 (MintKit Hub, 2012). This figure, however, turned out to be a little optimistic. According to the Bank, an early estimate of global growth during the year was 2.5% instead. In the professional community ranging from the practitioners in the trenches to the researchers on the sidelines the most popular benchmark of the stock market lies in the S&P index of titans. The latter yardstick covers 500 of the biggest names listed on the U.S. bourse. Many of the companies obtain a hefty portion of their earnings from their far-flung operations round the planet. As we expected a year ago, the U.S. economy expanded along with the global marketplace. Thanks to the benign milieu, the earnings of the giants within the S&P benchmark rose as well. 12

In line with our expectations, the stream of profits continued to grow. From a larger stance, the earnings of the companies within the index have been rising steadily since the depths of the Great Recession in 2009. As a reference point, consider the net income on a 12-month basis for the stocks within the S&P benchmark. At the beginning of 2009, the average profit came out to an annual sum of $13.31 per share, after adjusting for inflation and pegging the amount in terms of constant dollars at the price level for November 2012. A year onward, the corresponding figure soared to $57.68 per share. By the beginning of 2011, the income level swelled to $82.24 per unit and continued to rise throughout the year. Meanwhile the pertinent value for January 2012 came out to $88.85. In fact, the earnings per share had hit rock bottom at $7.42 per share back in March 2009. After that trough, the profits climbed steadily over the years to follow. The only exception along the way was a small hiccup in March 2012 when the income level slipped by 14 cents compared to the prior months (Multpl.com, 2013). As things turned out, March 2009 was also the point at which the stock market hit its nadir. At the time, the S&P 500 index plumbed a low of 666.79 points while its tracking fund dropped to $67.10. Based on the last two paragraphs, we can see that the stock market turned around precisely when the profits began to recover. In other words, the investing public was simply keeping up with the ongoing status of earnings for the companies covered by the S&P benchmark. So much for the fanciful notion that the stock market always predicts the real economy ahead of time. To sum up, the profits of the S&P 500 firms has been rising from year to year since the financial crisis of 2008 along with the global recession. The earnings per share on a 12month basis hit a low of $13.31 in January 2009 but climbed higher to reach $89.66 by June 2012.

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Last January, we expected the stock markets of the mature economies to advance by some 16% by the end of the year. This figure turned out to be a useful pointer. As an example, the tracking fund for the S&P 500 benchmark advanced by 15.99% over the course of the year. On the other hand, the corresponding vehicle for the Dow Jones Industrial index managed to pull off a mere 9.94% over the same timespan. On the bright side, though, the exchange traded fund for the Nasdaq 100 index climed by 18.11%. As to be expected, the panoply of countries round the world turned in a ragtag bag of mixed results. For instance, the ETF for Germany (ticker symbol EWG) boasted an upswell of 32.41% over the course of 2012. Meanwhile the tracking fund for Britain (EWU) turned in 15.33%, while that for Japan (EWJ) was able to eke out only 9.22% (Morningstar, 2013). For the stock markets in the emerging regions, we forecast a gain of 30% or thereabouts over the course of 2012. In line with the usual outcome, the budding regions witnessed a wide variation in growth rates, from less than nil to more than 40 percent. An extreme example of a loser lay in Argentina (ARGT). The index fund managed to crumple by a whopping 17.73% over the course of the year. By contrast, the troupe of lively markets was showcased by Egypt, whose index fund (EGPT) turned in a total return of 44.7% by way of capital gains and dividends. Another dynamo lay in the vehicle for the Philippines (EPHE) which vaulted by 47.9%. Even so, the bulk of the countries in the emerging regions fell below the nominal target of 30%. A case in point was the standard bearer for Brazil (EWZ), whose payoff amounted to a mere 0.4% over the course of 2012. Another slowpoke was Russia (RSX) which managed to advance by just 15.0 percent (Morningstar, 2013). A big reason for the labored progress of the budding markets lay in the concerns of the investing public over a slowdown in China coupled with knock-on effects throughout Asia and the rest of the world. As usual, though, the acute angst of the thundering herd turned out to be largely groundless. 14

As we noted earlier, the politicians of the West have opted to strangle their economies by propping up the huge distortions in the real economy resulting from the binge of speculation in real estate during the run-up to the financial crisis of 2008. Yet the housing sector is in general a key engine of growth for the entire economy. If the property market is bound up in chains, then the rest of the economy can at best merely limp along. In the absence of a wholesale change in policy, the bulk of Western countries will continue to gnash and grind well into the next decade (Kim, 2011, 2012). In that case, the real economy as well as the stock market will struggle mightily to make much headway. On the other hand, there is no good reason for the blooming regions of the world to follow suit. The emerging markets can and should trade with each other in greater volumes and thus ensure their mutual growth. As a fruitful byproduct, the upsurge of the spry regions will result in the uptake of imports in larger volumes from Western countries. The products in demand span the gamut from luxury cars and designer jeans to blockbuster films and cross-border tourism. In that case, the groundswell of growth will help to uplift the straggling nations of the West in spite of their litany of self-inflicted wounds and counterproductive moves.

Facing Forward
On the bright side, the outlook for world growth over the next couple of years is more sunny than usual since the financial flap of 2008 along with the Great Recession. As an example, the World Bank as well as the Conference Board expect the global economy to expand by 3.0% over the course of this year. Of the latter amount, the emerging regions will contribute the lions share of the increase; that is, 2.3%. If we dig deeper into the sources of growth, we find that the largest portion is earmarked for China with a harvest of 1.1%. Meanwhile India is the second biggest contributor, accounting for 0.3%.

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By contrast, the advanced economies will add only 0.7% to the overall figure for global growth. Within this morsel, the U.S. accounts for 0.3% while Europe and Japan each puts in 0.1% (Conference, 2013). Amongst the major economies, the U.S. is slated to speed up a bit from the growth rate of 2.1% during the past year to 2.4% in 2013 followed by 2.8% next year. Meanwhile the euro area will recover from the slippage of negative 0.3% last year to an advance of positive 0.7% in 2013 leading to 1.4% the next. Meanwhile China will pick up speed from the growth rate of 8.2% last year to 8.6% this year, followed by a slight easing to 8.4% next year. As usual another bright spot lies in India, whose growth rate of 6.6% last year will be bettered by 6.9% in 2013 then 7.1% the next. As a group, the developing countries will ramp up from the growth rate of 5.3% last year to 5.9% in 2013 and 6.0% next year. Given this backdrop, the emerging regions continue to offer ample prospects for juicy gains in the equity market. In line with the norm, the bourses round the world will fare far better on average than the bellwether in America. If the U.S. market swells by 16%, for instance, then a benchmark of budding markets should expand by roughly twice as much. To round up, the earnings of the companies listed in the stock market form a solid bridge between the real and financial markets. To begin with, the influx of profits depends largely on the vigor of the economy at large. In addition, the income level underpins a widely-watched ratio in the financial bazaar; namely, the stock price divided by the earnings per share. Due to the central role played by the ratio of price to earnings, the income stream has a crucial impact on the buoyancy of the stock market. In this way, the fortunes of the companies in the real economy have a direct effect on the lot of their equities on the bourse.

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On the upside, the real economy and the stock market are slated to fare better in 2013 than they did last year. Although the increase will be modest, the earnest investor can look forward to a smorgasbord of respectable gains even so.

Top Exchange Traded Funds for the Stock Market

At the dawn of the millennium, the United States continues to play the dominant role in the global marketplace. On one hand, the influence of the primo in the world economy has shrunk considerably since the glory days following the Second World War. On the cheery side, though, main cause of the slippage happens to be a benign one. The relative decline of the colossus stems not from the cutdown of the U.S. economy but from the steady upgrowth of the rest of the world including Europe and Asia. In spite of its waning clout, the U.S. still serves as the standard bearer on the global stage. When the stock market in America suffers from a mild swoon, for instance, the bourses in other countries are apt to take a sharp dive. Given the dominant role of the juggernaut on the financial stage, the mass media round the world have a habit of keeping tabs on the goings on in America. Where the stock market is concerned, the best known icon lies in the Dow Jones Industrial Average (DJIA). The Dow index was conceived in the twilight of the 19 th century as a proxy for the stock market as a whole. In its current form, the benchmark amounts to a simple average of the prices for 30 magnates listed on the U.S. bourse. The names within the pantheon range from McDonalds and Wal-Mart to IBM and Boeing. The DJIA is tracked by an index fund known as the SPDR Dow Jones Industrial Average. The latter vehicle trades in the U.S. market under the ticker symbol of DIA. The exchange traded fund is also known to its friends by the nickname of Diamonds.

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In spite of its popularity, the Dow index suffers from a couple of drawbacks. One handicap involves the fact that the benchmark covers only a small slice of a stock market that contains a myriad equities. To cite another weakness, the composite value is obtained as a simple average of stock prices. For this reason, a fractional change in the value of a high-priced equity has a larger impact on the benchmark as a whole than a similar shift for a stock with a lower price tag. Yet the absolute price depends in large part on the number of shares outstanding. In other words, the price level has little connection to the intrinsic worth of the company or its significance in the marketplace. In order to address these shortcomings, a novel index was launched in the summer of the 20th century. The benchmark, drummed up by a service provider named Standard & Poors, covers 500 of the leading companies listed on the bourse. The yardstick computes the average value as a weighted sum of the price levels. The weights depend on the relative heft of each company in terms of its total valuation in the stock market. The benchmark covers many of the biggest names on the U.S. bourse. The members of the circle run the gamut from Apple and Microsoft to Exxon and Pfizer. In the financial community, a common abbreviation for the Standard & Poors 500 index takes the form of SPX. A notable exception is found in Yahoo Finance the most popular portal amongst the investing public which likes to refer to the yardstick as GSPC. The exchange traded fund for SPX index flies under the banner of SPY. The latter vehicle is also known as the Spyders or Spiders. By contrast to the foregoing benchmarks, a couple of popular yardsticks deal only with the stocks listed on the Nasdaq market. The latter exchange entered the mainstream of culture in the throes of a bubble in Internet stocks during the late 1990s. Amid the gush of hype and froth at the time, the Nasdaq turned into a household name all across the planet.

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When the financial media reports on the performance of the Nasdaq bourse, they usually have in mind a broad-based benchmark of the market. For this purpose, the Nasdaq Composite index covers scads of basic stocks as well as built-up assets. Among the latter are communal pools in the form of exchange traded funds and master limited partnerships. Another type of security lies in a packet of foreign shares known as an American Depository Receipt (ADR). Given the motley types of instruments, the Composite benchmark covers more than 3,000 components. In this way, the Nasdaq Composite index is a sweeping gauge of the equities listed on the exchange. This yardstick is the usual benchmark reported by the financial media throughout the world. On the other hand, an index fund would face a huge burden in trying to keep track of thousands of stocks, many of which come and go in quick succession. The bulk of the equities on the Nasdaq exchange belong to small companies that have a way of popping up then pooping out within a handful of years. For this reason, tracking the Composite index would entail a heavy load in the form of administrative overhead as well as transaction costs. A leaner scheme lies in an alternative index that covers 100 of the leading names on the Nasdaq exchange. In computing the yardstick, the average price depends on a set of weights determined by the overall worth of each member in the marketplace. The Nasdaq 100 index includes companies that are based outside the USA. In this way, the benchmark differs from the custom behind the DJIA. In addition, financial firms are excluded from the Nasdaq 100 yardstick. For this reason, the composition of the benchmark differs from the texture of the DJIA as well as the SPX. In the financial community, a common abbreviation for the Nasdaq 100 index is found in NDX. Moreover the tracking fund for NDX sports the call sign of QQQ. The latter equity is also known as the Qubes.

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Over the short term, the trio of benchmarks for the stock market may move indepedently of each other. For instance, the Dow index and its tracking fund might creep upward while the other two yardsticks and their equity funds happen to slide lower. On the other hand, the three benchmarks tend to move in unison over longish spells lasting a few weeks or more. The linkage of the yardsticks of course shows up in the common direction of movement of the tracking funds, whether to the upside or downside. Despite the alignment in heading, though, the scope of movement can differ by a goodly amount. As a rule, the stocks of large firms tend to fluctuate less than those of their smaller peers. Since the Dow index covers 30 of the biggest names on the bourse, the tracking fund is wont to be more sedate than the others. In line with earlier remarks, the SPX keeps track of 500 bulky stocks. Despite the focus, though, the junior members within the ensemble are compact firms that are closer to the middleweight class than the heavyweight rank. Given the cohort of middling size, the Spyders tend to be a tad more flighty than the Diamonds. Meanwhile the Nasdaq 100 index covers the biggest names within the Nasdaq market. Even so, some of the these concerns are not that huge. Another factor involves the fact that the Nasdaq exchange contains a host of technologybased firms. On the whole, the equities of technical companies tend to be more volatile than the bulk of stocks. The small size and technical bent of the firms within the Nasdaq market affect the properties of NDX along with its tracking fund. In particular, the Qubes are prone to undergo wilder swings than the Spyders which in turn can be a tad more jumpy than the Diamonds. These hallmarks of the tracking funds show up in the relative performance of the vehicles since the eve of the millennium. In this light, the chart below has been adapted from Yahoo Finance (finance.yahoo.com).

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The timespan covers a stretch of some 15 years, running from the rollout of the Diamonds in January 1998 until the end of 2012. To serve as a baseline, the blue curve portrays the path of DIA throughout the interval. Meanwhile the green arc depicts the course of the Spyders over the same stretch. Although SPY was launched in January 1993, the price level has been reset so that its trace on the chart starts out at the same point as the arc for DIA. We can see from the exhibit that the Spyders were wont to edge out the Diamonds around the turn of the millennium. Unfortunately, SPY suffered a bigger breakdown than DIA after the burst of the Internet bubble in 2000 along with the ensuing recession. Since then, the Spyders have been unable to catch up with the Diamonds. By contrast, the path of the Qubes is rendered in red. The index fund was launched in March 1999 while the Internet frenzy was in full swing. The price level has been adjusted so that it starts out at the same point as the blue line for the Diamonds at that juncture. The Qubes blasted skyward until spring 2000, than blew up in a spectacular fashion. The rocket fell apart in stages over the next couple of years before the breakdown came to a halt. Since then, QQQ has partly redeemed itself by a habit of outpacing both DIA and SPY in the years to follow.

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The bottom pane of the diagram shows the volume of transactions for DIA. The most prominent feature is a spike in 2008. When the financial crisis cropped up, the madding crowd lost its senses and sold off everything in sight including the mainstays of the stock market and the real economy. But their fears turned out to be unfounded, and the world did not come to an end. The bottom pane also reveals a couple of smaller surges in the volume of trading. A case in point is a spurt in autumn 2011 that accompanied a newfound crash of the stock market. As we noted around this time last year, however, the blowup of the bourse that autumn was another pointless debacle. The gush of panic stemmed from overblown fears about the debt crisis in Europe along with the demolition of the global economy. In line with our forecast at the time, however, the world has managed to trudge along in spite of the brouhaha in the Old World (MintKit Hub, 2012). In fact, the stock market and the real economy have made some healthy gains since the crackup of 2011.

ETF Forecast for DIA

While the future depends on the past, the linkage does not apply in equal measure to all time frames. As an example, the current environment is likely to have a greater impact on the movement of the market over the near future rather than the long range. Looking in the opposite direction, the run of recent history should play a larger role than the course of the distant past in affecting the turn of events going forward. Simply put, the value of the lessons from the past tends to dwindle as the window of appraisal moves further away from the current spot. The state of affairs is similar for the credibility of any projections in the forward direction. Given this backdrop, the thoughtful investor has to trade off the big picture of an expansive view versus the greater relevance of a compact window focused on the recent past. That is, the decision maker has to balance the wealth of information contained in a long history of price data against the punch of a short record covering only recent events. 22

For our needs here, a fitting compromise between the opposing factors lies in a span of several years that includes an upsurge as well as a smackdown of the stock market. In that case, a helpful aid lies in a graphic display of weekly data for DIA over the course of 3 years ending in early January 2013. For this purpose, the exhibit below has been adapted from StockCharts (stockcharts.com), a standard resource for serious investors of a technical bent.

Given its target audience of savvy users, the online portal features a plethora of tools for carrying out diverse forms of technical analysis. Despite the wealth of techniques on offer, though, we will require nothing in the way of fancy tricks. Instead, a simple scheme based on visual cues will meet our needs. In fact, a lean and plain approach should turn out to be at least as informative for the long-range investor as a convoluted probe based on a heap of arcane techniques. The backbone of the chart above lies in a series of stick figures, each of which is known as a bar. An icon of this kind depicts the extreme values of the price level over a given timespan.

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In our case, each slot of time spans a single week. Over this spell, the critical points take the form of the Open, High, Low and Close (OHLC) values of the price record. For each bar, the top and bottom ends of the vertical stroke correspond to the maximum (High) and minimum (Low) values of the price range during the week. Meanwhile a stub on the left side of the stake depicts the value at the beginning (Open) of the period. In a similar way, a tick to the right side denotes the price at the end (Close) of the week. If the terminal value for the week happens to be lower than the initial level, the entire bar is colored in red. Otherwise the widget is rendered in black. The bottom portion of the exhibit shows the volume of transactions for the Diamonds. We will not make much use of this information other than to note that the turnover is comparable to the action in autumn 2010, just as DIA started out on an upward trek lasting more than half a year. There is of course no guarantee that the outcome going forward will be similar to the precedent. Even so, the prior record serves to illustrate the scope of possibility. Based on historical data from Yahoo Finance, we know that the Diamonds hit a low of $124.42 last November. This value lies in the same ballpark as the peaks reached several times during the middle of 2011. The price level is marked on the chart above by the horizontal blue line. This threshold, which acted as a ceiling in 2011, served as a floor during the latest swoon of the market in November. Meanwhile the yellow line on the chart spotlights the current uptrend. The speed of advance, along with the height of the waves on each pulse, provides a basis for projecting the course of the market going forward. During the previous pullback in the autumn, the Diamonds hit a low value of $124.42. By contrast, the trough during the prior backtrack in June occurred at the $120.19 level. The difference of $4.23 represents the size of the advance from one pulse to the next in the current environment.

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At the latest peak last September, the index fund hit a high of $136.48. Adding up the last two numbers gives us the best estimate for the next target; that is, $140.71. The latter milestone could well be reached by the middle of this year. After that stage, DIA will fall back toward the previous peak at the $135 level. Then the index fund will gather strength and push forward once more. In line with the scheme presented above, the subsequent milepost lies at the $145 marker. The Diamonds are slated to reach this landmark around the end of this year. At the close of 2012, the index fund wound up a price of $130.58. In that case, the first landmark at $140.71 lies about 7.8% higher than the year-end value. Meanwhile the second target at $145 stands 11.0% beyond the terminal level for 2012. After that stage, the index fund is apt to fall back toward its previous summit. A wrinkle in the forecast, however, relates to the behavior of the Spyders. If SPY breaks out into virgin terrain, then DIA 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 prior peaks stretching back to the turn of the millennium. On the other hand, the vehicle 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 shift.

Predictions for SPY and QQQ

The same type of analysis as we undertook above may be performed for the remaining duo of index funds. Since the procedure and reasoning are similar, however, we will forgo a detailed discussion here. Instead, we will move directly to the puch line for each of the tracking funds. 25

Based on current conditions in the marketplace, the first peak for the Spyders is apt to occur in the vicinity of $155. The latter summit stands 8.8% beyond the closing level for 2012. The latter value could well be snagged by the coming summer. After reaching this roadblock, the index fund will stall and stumble back toward the $147 level. There it will likely pause for a few months at least. The milestone in the $155 zone poses a major barrier to further progress. The reason lies in a chain 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 when the wildfire of the Internet burned most fiercely. The upsurge was followed by an echo of $153.59 half a year later. As a rule, it takes about 3 attempts for an asset in the stock market to surmount a historical barrier. In the current setting, we are approaching the roadblock for the fifth time. On the surface, then, the market is long due for a breakthrough based on its habitual behavior. On the downside, though, the highs in 2000 were scaled in the throes of a humongous bubble in the stock market. Although the firestorm affected the Nasdaq market the most, its heat was felt in every patch of the financial forum as well as the real economy. In a similar way, the zenith reached by SPY in 2007 arose at the height of the greatest ramp-up of real estate in modern history. The blowup was duly followed by the biggest smashup of the banking system and financial markets since the Great Depression of the 1930s. The story was similar in the real economy, whomped by the worst recession round the planet since the Second World War. Given this background, the summits reached in the heady days 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. 26

For this reason, the path forward is destined to be a rocky as well as trying. Moreover, once the Spyders do break through the massive barrier, the vehicle will fall back quickly and sink into a holding pattern near the landmark. In fact, the index fund could 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 first entry into the sticky zone. At this point, we ought to pause for a moment and note that the setup is similar for the Diamonds. That is, DIA is apt to spin its wheels at the same time that SPY flounders around at the $155 roadblock. When the ceiling is breached, the next milepost for the Spyders lies in the neighborhood of $170. The latter peak 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 summit this year. Instead, the index fund might have to wait another year or so before attaining the objective. By contrast to the wheezy progress of the Spyders and Diamonds, the outlook differs somewhat for the Qubes. As we can see from the first chart shown earlier, QQQ has a long way to go before it regains its prior summit back in 2000. The index fund closed out the year at a price of $65.13. The latter value is a far cry from the crest of $232.88 touched in March 2000. On one hand, the latter peak was scaled at the height of the Internet frenzy. The gush of hype and hysteria in the stock market at the time bore scant resemblance to the actual prospects in the real world. Despite the unhealthy nature of the ramp-up, however, the prior dash to airy heights has smoothed the way for a fresh stab at scaling the alps.

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For this reason, the Qubes will likely trudge higher even as the Spyders and Diamonds flop around at their respective thresholds over the next couple of years. That is, QQQ should clamber upward in fits and starts throughout the slippery period when SPY and DIA keep sliding back toward their historical peaks. The first milestone for the Qubes lies around $73. This objective, which lies 12.1% above the closing value for 2012, could be reached around the summer this year. The next milepost for the index fund stands at the $78 level. The target hovers 19.8% beyond the terminal value for 2012. On a negative note, however, the landmark is unlikely to be reached before the onset of the new 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 of the world. One 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 result in an uplift of 22% or so for the emerging markets.

Practical Thrust of the Forecasts

The predictions in the foregoing sections differ in a vital sense from the mass of forecasts proffered by the pundits in the financial media. At the onset of a new year, the usual call by the talking heads concerns the terminal value of the benchmarks at the end of the calendar year. On one hand, an augury of this sort has the advantage of being simple to express and easy to explain to the viewing audience. On the other hand, the bodement suffers from a couple of drawbacks. For one thing, the forecast is directly relevant only to the small subset of investors who happen to revise their portfolios precisely once a year, and at the beginning of January at 28

that. Yet a demure actor of this breed has scant choice but to remain committed to the stock market at all times. As a counterexample, its hard to imagine a lucid investor who says something like the following: What, will the benchmark rise by just 9 percent this year? Thats less than the minimum threshold of 13 percent that I demand. So Im not going to put any money into the stock market at all this year. Instead, the actor who tends to their account only once a year has little choice but to remain invested at all times. In that case, any effort to outpace the benchmarks of the market has to rely on the astute selection of stocks. That is, the equities within the personal portfolio will have to outpace the market averages. In that case, a precise forecast of the market is largely pointless. For instance, a forecast of growth amounting to 8% rather than 17% will have little or no bearing on the choice of a lively stock over a sluggish one. For these reasons, the usual run of predictions whipped out by the financial media are of limited use to the bulk of investors. If the calls are to have practical import, a better approach is to talk about the highs and lows over the year to come. The advantage of picking out the major landmarks along the way lies in the pragmatic benefit for the investor who is willing to tweak their portfolio more than once a year. More precisely, a position in a particular asset may be initiated or terminated in tune with the ups and downs of the stock market at large. For instance, suppose that the bourse has been rising for several months and is nearing its next milestone. If the investor agrees with the prior forecast of the turning point, they ought to trim their sails. An example in this vein is to sell off the most risky assets within a retirement portfolio. Another instance is waiting till the next trough before committing a fresh wad of cash to the stock market.

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In these ways, an inkling of the turning points in the marketplace is far more useful than a rigid forecast of the final value of the benchmarks at the end of the calendar year. And the nimble tack is the approach we have taken in this survey.

Scope of Market Forecasts

The future is an outgrowth of current conditions in tandem with prior events. For this reason, the deft planner looks in the backward direction as a prelude to mapping out the landscape going forward. On one hand, a long view of the past opens the door to a heap of data for analysis. On the downside, though, the distant past tends to have less of an impact than do recent events on the course of the future. Given this backdrop, the seer has to balance the richness of a bulky database against the clarity of a compact picture. As a rule of thumb, a longish history is most apt for sketching out the major outcrops lying in wait on the distant horizon. By the same token, a data set of modest size befits a presage of the near future. For our purpose here, a window of 3 years seemed like a suitable compromise in sizing up the prospects for the year to come plus a bit beyond. The timespan is a fitting compromise between the opposing factors of excessive clutter versus skimpy data. The battery of forecasts given in the foregoing sections portrays the most likely course of events over the coming year and more, based on the action to date in the real and financial markets. On the other hand, the default pathway could of course be derailed by any number of blowups. The bombshells of this sort take the form of natural disasters or human actions. An example of the former is a freakish snowstorm that knocks out the power grid throughout the eastern seaboard of the United States, thus throwing the regional economy for a loop. Meanwhile an instance of the latter is a software virus that wreaks havoc on the financial networks of the world. 30

For these reasons, any forecast has to be taken with a grain of salt. Even so, the reign of chance and whimsy is a reason for planning with more care rather than less. While nothing is certain, some things are more likely than others. In a chaotic world, a cogent plan laid out in advance is sure to boost the odds of success in bringing forth a favorable result. In the absence of any big surprises, the markets round the planet are destined to press ahead in 2013 along the lines mapped out earlier. Moreover the outlook for the years to follow might be tad less sparkling but still cheery even so.

A Caveat on Exchange Traded Funds

Since the eve of the millennium, the field of exchange traded funds has expanded at an explosive rate. The popularity of the vehicles springs from a number of factors ranging from the ease of handling and efficiency of transactions to the diversity of offerings and survivability of the rigs. On the upside, the profusion of index funds is a godsend for the financial community due to the convenience and affordability of investing in a multitude of markets round the world. On the downside, though, the domain suffers from a clutch of teething problems that beset any field in its infancy. A prime example lies in the difficulty of obtaining solid information on the slew of offerings in the arena. In this effort, the hapless investor faces a heap of challenges in dealing with the deluge of confounding data. One source of confusion lies in the sheer number and diversity of the products clamoring for the investors attention. Another stumper involves the dissemination of sham data on exchange traded funds from otherwise respectable sources of information (MintKit Core, 2013).

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In seeking out the best vehicles for investment, an initial step is to sort the slew of index funds into sundry types of assets. Within each group, the standard bearer may serve as a baseline for comparison and perhaps even the vessel of choice. From a different angle, a cogent way to deal with conflicting information is to compare and contrast the dope provided by the leading portals. A related tack is to review the information from a particular source and determine whether the facts appear to be internally consistent. In addition, the thoughtful investor ought to display the price stream over time in a graphic form in order to obtain an intuitive grasp of the action in the marketplace. Another recourse is to confirm whether the visual plot appears to be consistent with some key pieces of numeric data. An example of the latter lies in the maximum level or the final value of the price record. As in any domain racked by rampant growth, the vale of exchange traded funds is hamstrung by a shortage of telling and trusty information. On the upside, though, the billow of din and smog in the field will doubtless clear up as the years and decades go by. In the meantime, the heedful investor has to contend with the dismal state of affairs by drawing on personal reserves of gumption and judgment. Given the ample attractions of exchange traded funds, however, a modicum of extra effort is surely justified in order to screen out the proper information needed to fix up a sound program of investment.

References
Conference Board, The. Global Economic Outlook 2013. http://www.conferenceboard.org/data/globaloutlook.cfm tapped 2013/1/1. Kim, S. Forecasting the Next Crash of the Stock Market. 2011/11/23. http://w.mintkit.com/2011/11/forecasting-next-crash-of-stock-market.html tapped 2013/1/1.

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Kim, S. Charade of the Debt Crisis: From Buffoonery to Tragedy in the Debt Folly and Euro Farce. MintKit.com: MintKit Press, 2012. MintKit Core. Cruddy Information on Exchange Traded Funds: Guide to Choosing Exchange Traded Funds in Spite of Shifty Information. http://www.mintkit.com/cruddyinformation-exchange-traded-funds tapped 2013/1/9. MintKit Hub. Market Outlook for the Early 2010s: Forecast of the Stock Market and Global Economy. 2012/1/27. http://w.mintkit.com/2012_01_01_archive.html tapped 2013/1/5. Morningstar. ETF Returns. http://news.morningstar.com/etf/Lists/ETFReturns.html tapped 2013/1/1. Multpl.com. S&P 500 Earnings. http://www.multpl.com/s-p-500-earnings/table tapped 2013/1/1. World Bank. Table 1. The Global Outlook in Summary, 2010-2014. http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGBL PROSPECTSAPRIL/0,,contentMDK:20370107~menuPK:659160~pagePK:2470434~piPK: 4977459~theSitePK:659149,00.html tapped 2013/1/1. * * *

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