A year that can be best described as directionless has ended with a sinking feeling. After the dollar began falling in mid-November, equities followed right on cue in early December. Major indices are now 2-3% off their highs and looking feeble. How will this week's action translate into the new trading year? Personally, I perceive a strong downward bias in equities, but how things move on Day One of a new year is a wild card. Rather than guessing, I will just wait to see what the market tells me. Either way it works out, I expect we will see a bull/bear battle of epic proportions.
However, regular market watchers (and readers of The DOCument) know that the equity run that began in March 2003 is weakening. The dollar appears to be rolling over. Inflation is accelerating despite what our government, via Federal Reserve babble, would have us believe. Mountains of debt keep piling up in private and public ledgers. Uncertainty in the political arena, as well as with energy costs, are forcing companies to postpone investment decisions. Growth in housing prices is slowing and may even halt or reverse in 2006, removing a major impetus for consumption. Add to these concerns the facts that stocks are already expensive and that bond yields are rising, and we have an environment that is very adverse to bull markets.
I plan to spend the long weekend re-reading posts from respected prognosticators like Marc Faber, Bill Fleckenstein, Martin Goldberg, among others. As with any practice that requires strong instincts, the only way to get better at trading is constant study and practice. Happy New Year to everyone, and best of luck with your 2006 trading!