Rev Shark:
Keep a 2006 Framework, but Remain Adaptable
Finish each day and be done with it. You have done what you could. Some blunders and absurdities no doubt crept in; forget them as soon as you can. Tomorrow is a new day; begin it well and serenely and with too high a spirit to be encumbered with your old nonsense.
-- Ralph Waldo Emerson
We are nearing the 2005 finish line, and many investors are starting to look ahead to what the new year might bring. Although the sentiment polls reflect a high level of optimism, there seems to be a steady flow of negativity in many year-ahead predictions. Although the economy is plodding along, the Fed is sounding more dovish, valuations are fairly reasonable and energy prices are falling, many feel that 2006 will be a very difficult year for the market.
The primary worry that many folks have is that a weaker housing market will crimp the consumer. Not only have consumers been able to use their home equity as an ATM, but the steady appreciation has also produced a "wealth effect" that kept consumer confidence high.
I see more reasons to be optimistic rather than pessimistic about 2006, but as always I don't find a lot of value in trying to anticipate these things. Predictions about the year ahead can help provide a framework in which to approach the market, but we always must be prepared to adapt and react to changes as events unfold.
Right now our focus should be on how we close out the two remaining days we have in the year. Many folks are quite disappointed that we haven't managed a better year-end rally. It has been anticipated, and so far we have nothing much to show for it. Many have thrown in the towel, declared the Santa Claus rally dead and will be looking to get busy once again after the first of the year.
The big question we confront right now is whether or not we will see an end of the year window-dressing bounce. I believe there is a good chance that the buyers will step up and try to boost some of their favorites.
The motivation for this isn't any great mystery. The market is dominated by mutual funds and professional money managers who live and die by how they perform vis-ą-vis a benchmark index. Their goal is to bolster their relative performance as much as possible. They will even settle for better absolute performance as it is useful in raising more capital.
How do you boost relative performance? You make sure your biggest holdings finish the year strong. If you are overweight Apple (AAPL:Nasdaq) and Google (GOOG:Nasdaq), the best thing you can do is try to push them up a greater percentage than the overall market. However, if they are pushed up, they usually take the broader market with them so they need to push those stocks up even further and so on.
The bulls have been quite inept so far this holiday season, and it appears many are getting nervous and skittish. That may be exactly what we need to finally get some action going here. As soon as the Santa Claus rally is declared dead, it will likely begin.
We have a slightly positive start on the way. Overseas markets are quiet but positive, gold is up again and oil is showing a little life. Prepare for a bumpy ride.
Position: No positions in stocks mentioned.