Recent market action is very
typical of fourth quarter trading. Although we are in the seasonally
favorable November to April period (see Yale Hirsch's Stock Traders
Almanac for historical perspective), this does not mean the market is
immune to wide swings as it ebbs from overbought to oversold. I do believe,
however, that investors can look to buy any near-term correction, that the
market is lining up for a solid year-end rally with follow through likely
into 2006.
I wrote on October 26th
that a little more selling might be constructive. While we weren't fortunate
enough to get that final wave of selling, as odd as that sounds, perhaps
another short-term buying opportunity is coming soon. The days surrounding
Thanksgiving often bring about the completion, or re-test, of the initial
rally off the October lows. First we see the market bottom near Halloween
amidst oversold and sometimes washed out conditions; interestingly, many times
such action corresponds with the October 31st year-end for mutual
funds, which dump their losers at about this time as they close their books
for the year. A quick bounce frequently follows in early November, with a
pause to consolidate those quick gains coming later in the month that often
lasts until mid-December.
This pause may be no more than
that nap on the couch between football games on the way to more turkey after
the guests leave.
Finally, perhaps as individual
investors wrap up their tax-loss selling, we start to see more strength into
the last days of the year; it looks like such classic market vigor is likely
and I now believe that it will carry into 2006, in contrast to 2005, when the
January rally was a bust. Just yesterday one intermediate-term indicator I
closely monitor, the bullish percentage of all optionable stocks, reversed
up, confirming recent strength in shorter-term gauges and giving me
confidence of a more lasting up-trend.
Next year will certainly see
some interesting developments. Despite what you may have heard recently,
history has actually been kind in the early months of new Fed regimes and the
stock market also tends to like the ending of the tightening cycle. With one
certain to occur in 2006 and the other one likely, the combination of the two
is likely to have a surprisingly powerful bullish impact. Right now I am
concentrating new buying in the Internet, Software, Investment brokers, and
with a further pullback, perhaps the Oils. International holdings,
particularly Latin America and emerging markets, also continue to act well.
Because there seems to be so
much to worry about rising interest rates, avian flu, high energy prices, a
politically damaged White House, the end of the Greenspan era and more - the
surprising move in early 2006 would be stock market strength, which is
precisely what makes that outcome likely. As a result, investors should look
to do some buying if the market takes its traditional Thanksgiving nap.
