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.