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December 27, 2006

That’s All He Wrote

Market action is unfolding in the rather typically drab fashion witnessed by the closing days of a year, and I intend for these words to constitute my last post of 2006.

As has been the game since summer, stocks were higher today, with the S&P 500 coming very close to a new high. I am sure the victorious bulls would like to see this index exit 2006 at highs, and they are in a position to make it happen. Today's buying spree seems to have been enticed by a stronger-than-expected new home sales report, but I am skeptical (big surprise). The median sales price figure does not take into account massive incentives being offered by home builders. Once builders are no longer in a position to offer these incentives, we will see a rapid deterioration in the government figures, which again will be a big "surprise."

How we open 2007 is a coin toss. The first few trading days of a new year are subject to many more variables than the rest of the year, but I do believe this tortuous rally is nearing its end. The Nasdaq, which tends to lead other major indices, is beginning to break down. General Motors, the Dow dog that doubled in the face of weakening prospects and served to fortify the bull case, has clearly lost its upward momentum. Uncertainty is growing with regard to interest rate policy, earnings potential, and consumer demand… and uncertainty breeds risk premium. Most importantly, bulls feel bulletproof while bears feel bullet-ridden.

Precious metals eked a bit higher today, though I think a bit more slippage is in order before we get a big move higher.

As each year winds down I like to jot down what I think will be the major tradable themes for the next year. Having such a list helps a trader keep perspective when volatility kicks into high gear. I will post my thoughts on next year's themes in a market outlook article in coming days.

Wishing a prosperous new year to all except those on the other sides of my trades...

Disclosure: None


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