2005: A Move Higher, Until...
The market should move higher next year, but don't expect a repeat of 2003's bullish advance. The economic expansion may run out of gas in the months ahead, and the next recession could emerge in the next 24 to 48 months. In turn, this might trigger the next leg in the secular decline that began almost five years ago.
Past price action can predict the market's future with great accuracy. As it turns out, the fall rally is sitting just above levels that have triggered key reversals in the past, and despite the current euphoria, it may not be any different this time around.
Let's rewind a few years and examine the crosscurrents moving the ticker tape at that time. I believe that volatile time period holds the key to market direction next year.
The first wave of the bear market dropped the S&P 500 index to the March 2001 low at 1081. The 22% rally that followed the low had folks thinking the correction was over. In fact, the Dow came within striking distance of its bubble high by May of that year. But the move fizzled out, and the indices began a long decline back to their March lows. I still remember how the S&P 500 bounced strongly on the day it returned to this price level. That was Sept. 10, 2001, and the solid close had traders expecting a rally to start the next morning. Of course, things didn't turn out that way.
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