Expecting the Unexpected

Only two factors matter next week: Flow of funds and profit taking. And we can't predict either.
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We can game earnings. We can game interest rates. We can even game the macro environment. But we can't game flow of funds or profit taking.

Yet, those are the only two forces that matter next week. Will the flood of money into equities, via 401(k) contributions and annual pension payments blunt the desire to take profits on the stuff that has had such a magnificent run these last seven weeks?

What a tough call, yet it is one that must be made. If you ask me whether, say, the Net is going to sell off at the beginning of the year, I have to answer that I think, yes, for all of the reasons that I have given these last few weeks. I am betting that the profit taking in this sector will be intense as all get out and that the group goes into a ferocious tailspin.

For this tailspin I want to be only in the ones that have the least hype and the most chances of large profitability built in. I am betting I can pick up the others in mid-January at lower prices if I want to. I am not shorting these stocks or buying puts on them because while I think the group is way overextended, the ones I hate can't be borrowed, or are too vulnerable to be squeezed up, or have puts that won't make you money even if the Net were shut down for a week.

But what about the rest of the market? Could we have a January rally based on inflows that could carry us to 10,000? After all, we already know who preannounced:

Procter & Gamble

(PG) - Get Report

,

Gillette

(G) - Get Report

,

Minnesota Mining & Manufacturing

(MMM) - Get Report

,

J.P. Morgan

(JPM) - Get Report

, etc., and they are all HIGHER than they were when they blew up? What gets them down now?

Numbers have already been cut, and number cuts are what really hurt stocks. Could we be set up for a rally simply based on the fact that billions of dollars will come into the market? The buoyancy of this market, and its lack of memory for those with earnings problems, emboldens me to think that January could be sanguine.

In previous years, I have come in underinvested and lived to regret those first few days of the year. So, just as every other time that I am unsure, I am going into the new year with some cash, some new positions in beaten-down tax-loss stocks that should get a traditional January bounce, a pared-down Net position because of feared profit taking and large positions in tech because I think the first-quarter numbers surprise to the upside. Some of my favorite techs are already correcting now, which makes me feel better about their prospects as we head into earnings.

The dicey ones are the drugs and the banks. I think the banks are going to shine, as nobody has high expectations, but you always have to keep one eye on Brazil when you are long the banks, and that eye is very sore indeed right now. I am sticking with the banks that have mostly domestic exposure, save

Chase

(CMB)

, because Chase already told us things are fine. I think the financials will trade up to old highs (as expressed by the BKX) once the quarters are known.

I pared my drug stocks back a few quarters ago, and I am now watching a classic end-of-the-year rally in this group, with the intent of selling into it on the last day of the year. While I am not concerned about the quarters here, I don't think you are going to get the massive upside that you need to power these stocks much higher.

Remember, though, the key variable will be those fund flows. If they are as strong as I think they might be, you could be in for a wildly positive ride for the broader market.

Random musings:

So I click on the picture of

Herb Greenberg

and me and we get a couple of

Furbys

. Hoo-hah. What a bunch of funny guys at

TheStreet.com

.

Remember, you have been forewarned: The technological shift that takes

TheStreet.com

out of the Stone Age is right around the corner. Should be seamless. But I have my fingers crossed.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. At the time of publication, the fund was long Chase, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at

letters@thestreet.com.