Thursday, December 08, 2005


The current Bull rally has been a nice one and it ain't over yet! Sure it is currently nervously pawing the ground back and forth. But, it is preparing for the next charge. After the FOMC makes its expected quarter point increase next week, there will be good news ahead; the vote in Iraq, the potential passage of compromise bills in congress and the phased pull out of troops in Iraq. The market is anticipating the end of the tightening cycle and the end of the heavy fighting.

The rub, posted today by my good friends at The Contrary, is that over the past 50 years, the S&P 500 has been up 1.87% on average in the 12 months after the last rate increase. On the other hand, the S&P has been up an average of 17.3% in the 12 months after the first rate decrease.

I believe 2006 is going to be a good year for investors. However, the above is a word of caution about getting too euphoric when the last of the rate increases has been announced (or for any other reason). It would be wise to be bullish prior to the last increase and cautious afterward. I know this is counter intuitive, but the market often moves up when it senses that the last increase is near.

I plan to study the data tonight. It is likely that the data actually shows that the typical mid-cycle correction is quite different than at the end of a long upswing. The current relative value of stocks to bonds and to real estate is strong. Investors should be in stocks. Being in the right sectors is the trick.