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2006 in ReviewBruce Zaro
Looking back at 2006, the breakout of the Dow on January 6th at 11,000 may have ushered in a new era for the US markets. With that move, the market's 6-year recovery seemed complete and the subsequent follow-through breakout in May at 11,500 has been impressive. Nightmares about the post-1990's collapse finally faded as the realization sunk in that corporate profits have been piling up at double digits rates for years now. Finally, equities were waiting for one event that had been so illusive - a pause from the Fed. Since the middle of 2005, investors had been bidding up stocks prior to each Fed meeting in hopes that this time the spell of higher interested rates would be broken; most times, the market sold off as those hopes went unrealized. I wrote on June 13th of 2006 in Delta Global's Morning Meeting notes titled "Market Reversals Imminent" that it appeared the ugly market sell-off that had started on May 10th was about to come to an end. Deeply oversold conditions and wildly bearish sentiment led to this earlier than normal mid-term election bottom (truth be known, I had expected a mid-term election bottom later in the year. While the timing is always difficult to pinpoint, I have strong convictions that the rapid 8% sell-off we saw this year, which bottomed in July, was a very significant bottom, possibly the second such major inflection point- October 2002 being the other- in the post -911 market). I believe chart based analysis is valuable in confirming one's fundamental outlook. Personally, I developed a very positive fundamental outlook to the markets late in 2005 and had written on January 11, 2006 ("Will the Strong Start to '06 Last?") that these positive fundamentals would unfold during 2006. In retrospect, the November 2005 bottom may have been foretelling that the Fed's rate increases would cease 9 month hence, the top choice on the wish list of most investors. Front and center in this article was a prediction of Dow 12,400, some 1, 400 points above the current closing price. Meanwhile, the NASDAQ has so far fallen short of my 2,700 price objective, but more on that later. Outlook for 2007 Dow Jones Industrial Average
- (DJIA 12,423) I happen to expect the market to make additional progress in 2007 as profits remain strong, although it remains a good possibility the string of consective quarters of double digit growth will be broken. Inflation may shrink a bit, contrary to what yields on the inflation sensitive TIPS bonds are telling us, and while some consolidation is in order and could hit at any time, it's unwise to be bearish on stocks at this time of year. As we get to the end of the seasonally favorable period - April - then I will likely take more defensive capital preservation strategies. As of today, however, my target on the Dow now stands at 16,500. Nasdaq Composite - (COMP
2,418) An encouraging sign that the market rally has further to go is the growing appetite for risk. Indeed, from the July bottom the NASDAQ is up 22% versus the Dow's 16% rise. Year-end tax trading and lack of liquidity has resulted in a bit of lost momentum for the NAZ, but with the January effect around the corner, NASDAQ out-performance is likely to widen in the coming weeks. I would caution that the index and its components are exhibiting some pretty brutal volatility right now. Furthermore, additional short-term indicators I follow have reversed down to signal more consolidation is near. Still, investors should generally look to use pullbacks as opportunities to initiate positions, albeit in technically healthy stocks which also have well-defined stop points. This remains a time one should want to be pretty fully invested. My own NASDAQ target is 3,360, but bear in mind that in the types of analysis I employ it often tends to be timing that is most difficult to gauge, with my 2006 NASDAQ target standing as one overly-optimistic example (although the direction was surely correct). US Treasury 10 year Yield
Index (TNX 4.59%) More on specific sectors, including commodities, in part II. **The Canadian government's recent proposal to dramatically alter the royalty trust landscape continues to weigh on the minds of investors. To learn more, get "Ottawa Bombshell!" our exclusive, free report on this important situation by visiting: http://www.deltaga.com/reportForm.asp?rep=4 Dec 28, 2006 Over his 20-year investment career, Mr. Zaro has become a highly-regarded technical analyst who runs private client portfolios at Delta Global. For the last year he served as Managing Director of Granite Wealth Management outside of Boston and spent nearly 15 years prior as a Vice President at Gage Wiley & Co. His current firm is full-service, but specializes in providing international market access as well as alternative investment strategies.
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