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The Market Remains Stalled

 
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arthur
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PostPosted: Sat Dec 17, 2005 10:34 am    Post subject: The Market Remains Stalled Reply with quote

BEING STREET SMART

By Sy Harding

THE MARKET REMAINS STALLED! December 16, 2005.

The market's favorable season, which traditionally begins in October, got off to a shaky start this year, but then launched into a rally in which it was up for five weeks in a row in November. However, in spite of improving economic news since, it has made no further progress in December.

Thanks entirely to the rally in November, the Dow is now up 4% year-to-date. The S&P 500 is now up 5% year-to-date. And the Nasdaq is up 1.3%. That's almost a duplicate of last year, when only a rally in November and December prevented the market from being down for the year of 2004. This two-year 'going nowhere' pattern is abnormal and will change in one direction or the other at some point.

This week the market extended its dilemma of the last three weeks, of not being able to rally even on good news.

On Tuesday, investors received a gift from the Federal Reserve that has been on their wish list all year. While raising the Fed Funds rate another 0.25%, as was expected, the Fed finally dropped the troublesome phrases from its announcement that "monetary policy remains too accommodative", and of "further rate increases at a measured pace." Yet the stock market ignored the long hoped for dropping of those phrases that may indicate the Fed is near the end of its rate-hiking cycle.

On Thursday the market also received what appeared to be good news on the worrisome inflation front. The Labor Department reported its Consumer Price Index plunged 0.6% in November, its largest monthly decline since way back in 1949. There was a problem with the report. The entire 0.6% decline in overall CPI was due to a big 8% drop in oil and gasoline prices in November, and that drop was only retracing some of the dramatic hurricane related spike-up in energy costs of the previous months (such as the spectacular 12% rise in oil prices in September). In the long-term picture, energy costs have risen 18.3% in the past 12 months. So it was understandable that the report did not relieve the market's concerns about rising inflation.

However, on Thursday, it was also reported that U.S. industrial production rose 0.7%, and manufacturing output rose 0.3%, in November, while the New York State Manufacturing Index rose sharply, to 28.7 in December from 22.8 in November, and is now at its highest level of the year. Economists had expected a decline to 19.0.

The Treasury Department also reported that foreign buyers, mostly private investors, continued to pour money into U.S. financial assets, to the tune of a record $106.8 billion in October, the latest month for which data has been compiled.

That is an interesting situation, since U.S. investors have also been piling into foreign investments at an unusual pace this year. U.S. investors, nervous about the U.S. market, are buying foreign stocks, while foreign investors, nervous about their markets, are buying U.S. stocks. The downside of that is that foreign investment usually picks up in both directions toward the end of global good times, as investors lose faith in their own markets, about which they have more knowledge, and look to foreign holdings, where they are usually not as aware of the problems. Yet it was good news for now that foreign investors continue to pour their money into our market.

However, it wasn't all good news this week.

The U.S. dollar which, after a severe three year decline, had rallied strongly for most of this year, has been declining again since November. And its decline continued this week. Unfortunately, Wednesday's report that the U.S. trade deficit worsened in October, to a new record high of $68.9 billion, was a further negative for the dollar.

I said in October that a window of opportunity should open for a typical year-end and favorable season rally once third-quarter earnings reports and the hurricane season were history, but that it would not be a time to adopt a buy and hold strategy. That remains my opinion.

Meanwhile, it will be interesting to see if the 'Santa Claus rally' shows up on schedule this year. The Stock Traders Almanac coined the description many years ago for the rally that usually begins the day after Christmas and lasts through the first two days of January. Yale Hirsch, founder of the Almanac, also fashioned this couplet, "If Santa Claus should fail to call, bears may come to Broad and Wall", based on his observation that when a year ends badly it is sometimes a harbinger of things to come.

It is also interesting to note that the long-time record of January being a positive month is becoming tarnished. Of the six years since the end of 1999, the S&P 500 has only been up for the month of January in two years (2001 and 2004), and even then only by fractional amounts. February? Up only two years (2004 and 2005).

If the rally continues to be meager, with gains so small, the key will be not to be greedy and stay too long, even if it means leaving some money on the table if the rally picks up after exiting. To paraphrase what famed investors Bernard Baruch and Joseph P. Kennedy both said, "I always sold on the way up."

But selling on the way up is not easy when 'up' is so flat and selling even a few days too late can wipe out all the gains.

That may be what has the market stalled, since, thanks to the November rally, it was reported last week that most hedge funds are now in the black for the year by a small amount. They may be locking those small gains in, by taking their profits rather than risking being in the red for the year.

We have used a leveraged fund to increase the gains, as well as areas away from the U.S. market, which have produced much bigger gains, gold and the Japanese market in particular. But taking the gains with decent timing and moving on to other areas, perhaps even short-sales and bear-type mutual funds at some point, is still going to take some effort.
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