Can the market keep it up?

We went into last week cautiously because of the market action during the holidays.  We anticipated a small bounce during the week because of that weakness but that turned out to be the understatement of the decade as stocks have flown out of the gate so far in 2006.

Friday's December employment report capped off a strong week when the new jobs came in well below estimates.  That usually sends the market down but a higher revision to the November report gave the market a perfect storm of economic news.  I interpreted the reaction as investors saying, yes the economy is moving along very nicely (November's high numbers), but not so nicely that the Fed must keep raising interest rates (December's low number.)

The strength is certainly impressive and from a technical standpoint a breakout does tend lead to future higher prices, in the longer term.  In the short term however, you'd expect to see some profit taking sooner or later.  Fighting this strength won't hurt your account but it won't help it either.  I don't see any immediate reason for a sharp pullback but as I have been saying for weeks now, the market really does need to take a break before the longer term picture will improve.  Even if you are winning the race, you have to stop to refuel eventually.  The holiday lull may have given the market the needed energy for this recent bounce. 

A pullback is inevitable but will it come this week, next, next month?  Will it be a long, slow drop or a quick sell off?  No one know for sure and that is why I remain cautious.  I'd rather be a buyer of fear than of this frothy action.  To be honest, the short term indicators aren't as overbought as you might think after a rally like we just had.  It's the intermediate term indicators that are still flashing the yellow light.

At Decision Point they follow a four year cycle chart that says some time in the fourth year we usually (85% of the time) see some significant weakness before the next leg up higher.  You can see below we are now entering the fourth year of this cycle, a cycle that has yet to see a significant pullback.


                                   Chart provided courtesy of www.decisionpoint.com

I know it has been frustrating being on the sidelines but I am pretty confident that our conservative approach will pay off for us eventually.  I never have been great at calling the short term action.  That RevShark's department.  Some of our readers are also very nimble and seem to move in and out very well.  I am just sticking with my game plan for now.  I usually regret deviating from my strategy as I seem to do it at the wrong times.  When the light is green I'll be ready to put more money to work in stocks.  I could pop in and out of stocks on smaller pullbacks here and there, but let's see how things play out.

That’s all for today.  Currently 50% G, 50% F.  Thanks for reading.