Optimists and Pessimists in 2006

May 22, 2006
By seadmin

So far, so good in 2006, right? Well, not quite.

The first two months of the year in the U.S. stock market have been an interesting study in the struggle between optimists and pessimists, and that often leaves pragmatists like me caught smack dab in the middle.

At the onset of the year I reasoned that there was a 60% chance that the market would run with the bulls, and a 40% chance that the market would be mauled by the bear. So far, both bull and bear have made their mark.

The major averages — Dow Industrial, Nasdaq Composite and S&P 500 — are all higher year-to-date, but most of those gains came early in the year, with a buying spree that lasted for the first two weeks of the year.

Since that early 2006 buying spree, the market has been on a roller coaster ride of sorts. There have been several 100-point down days on the Dow to go along with the several 100-point winning sessions. And while some sectors of the market continue to perform well, stocks that led the market higher early in the year — namely big-cap tech stocks — have really pulled back here at the end of February.

There’s a lot of conflicting data out there right now about inflation, economic growth, consumer spending, industrial production, etc., and nobody seems to have a real clear picture on where things are headed. When this happens, you get that seesaw market that we’ve seen thus far in 2006.

So far this year the major averages are teetering on the brink of what we call Alert Mode. Alert Mode simply means that the averages are within 5% of generating a Sell Signal in the Successful Investing Plan. This is a big yellow caution flag for the market going forward, as it signals to us that the long-term outlook for stocks may be to the downside. Tuesday’s big drop in the stock market is indicative of this kind of potential downtrend, and that means making money this year will be a challenge.

Don’t get me wrong, I am not saying that the bears will win the battle of 2006, nor am I siding wholly with the pessimist camp. What I am saying is that as the year goes by and the strength in this market falters, the chances increase that the U.S. markets will have tough slogging in the weeks and months ahead.

Fortunately, there are still ways to make money in this market, and that is why we are continuing to recommend small- and mid-cap stocks. We’ve also just recently made a new allocation to a hot sector that has experienced a sharp pullback and is at very attractive levels right now.

To find out more about this new allocation, and to position your portfolio to profit regardless of market conditions, check out my Successful Investing service.


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