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Despite hurricane-force winds, tremendous corporate profitability, a strong economy and buoyant investor sentiment, the stock market has gone absolutely nowhere this year.

Weird, huh? You could have slept through the first three quarters of the year and not missed a thing. The S&P 500, representing large U.S. companies' shares, is up less than a quarter of a percentage point, while the Russell 2000, representing small companies' shares, is up roughly 0.6%.

Now here's something that's maybe even a little stranger. The market was in exactly the same shape last year at this time -- precisely flat. The S&P 500 opened for business on the day after New Year's in 2004 at 1111 and closed on Sept. 28, 2004 at 1110. The Russell 2000 opened 2004 at 556 and closed Sept. 28, 2004 at 558.

All that lateral travel was just about to end last year at this time, as small stocks ultimately rallied 15% in the last quarter of 2004 and large-cap stocks rose about 9%. And the same is probably about to happen now, with a diabolical twist.

A Sea of Change

With the caveat that it's easier to become U.S. chief justice than to foretell markets, I will venture out on a limb and forecast that shares are about to enter a short period of intensely nauseous churn but will end the year a tad higher -- perhaps as much as 5% higher. Nothing to write home about, but better than a poke in the eye with, well, a sharp stock. After that, 2006 will hit investors right between the eyes, leaving them with losses in the low double digits.

In boaters' language, we are about to witness a battle between wind and tide. The wind blowing U.S. companies forward is strengthening global demand for electronics, houses, toothpaste, movies and furniture because of the materialistic aspirations of emerging markets' middle classes. This is not speculative blather about China, India and South America. It is real, and it is happening.

The tides pushing companies back to shore are Federal Reserve Chairman Alan Greenspan's zeal to deny those very things to the middle class in the U.S. by raising interest rates over his head like an carnival muscleman, a continuing escalation in oil and gas prices, a runaway federal deficit that draws funds away from more productive uses and a persistent erosion of job growth and consumer confidence.

My guess is that the wind will battle to a tie through the end of the year, but the tide will succeed in the end, because, eventually, the Fed virtually always gets its way, and because the market typically stumbles in the second year of a presidential administration -- 1990 (-9%), 1994 (-2%) and 2002 (-23%) being prime examples.

Here are four guideposts for the coming turbulence:

1. Earnings Growth Surprises

In June, analysts estimated that S&P 500 companies' earnings would rise 15.1% (annualized) in the third quarter. But it looks like they're coming in at more like 17.9%, according to Thomson Financial Research. A lot of that is energy, of course, with some major oil companies' earnings estimates up 29% to 56% in the past three months (the highest for any sector since early 2003). Despite the depressing effect of Hurricane Katrina on insurers, financial companies are also expected to come in strong, with a 21% annualized growth rate -- primarily due to easier comparisons to last year, when insurers suffered through a series of Florida hurricanes.

On the downside, according to Thomson data, the sectors most likely to suffer stumbles are chemical and other basic materials makers, which are forecast to see income decline by as much as 5% overall, and consumer discretionary companies such as General Motors ( GM) and Walt Disney ( DIS). Look for modest gains in the third quarter but warnings of poorer results ahead in the fourth quarter and 2006.

2. Energy Stocks Surprise

This is a tricky one. Energy exploration companies' third-quarter earnings will show a big boost due to higher prices for crude oil and natural gas. Many cynics will figure that this is already discounted in the stock prices, and figure the sector will sell off as energy prices moderate. But it's really not that simple.

As explained in my column three weeks ago , commodity producers are alone in the investment universe in their ability to secure future selling prices for their output. A couple of years ago, most of them sold two years' worth of their output for what seemed then to be very high prices in the $25-$35 range. So many have not even seen the benefit to their bottom line of $40 oil and $8 gas, much less $65 and $12. As those "collars" roll off, earnings growth will be off the charts, and current valuations will seem cheap. Strange as it sounds, this isn't in a lot of the stocks yet, so their prices can still go much higher even if the commodity flatlines.

3. TV on the Internet

Every quarter needs a new-technology star, and this could be it. In the mainstream, the hot electronics toys for the holiday season are likely to be flat-panel TV screens and the nano music player from Apple Computer ( AAPL). But among institutional fund managers, more attention will flow to a technology called IPTV, which is short for Internet protocol television.

Quick bit of background: Cable television and regional Bell operating companies are in a life-and-death battle to be the leading provider of the "triple play" of telecom services to homes: data (broadband), voice (telephone) and entertainment (TV). For cable companies, data and entertainment are easy, while voice is hard. For phone companies, voice and data are easy, while entertainment is hard. Cable companies are shouldering into the voice business via voice-over-Internet initiatives (along the lines of super-startup Vonage).

And now phone companies are trying to muscle into the entertainment biz with experiments to shoot television signals through their fiber-optic networks and DSL connections into customers' TV sets. If they're successful, TV will never be the same, as customers will come to exert complete control over what they watch and when they watch it; it's TiVo on steroids. Imagine emailing a Jeopardy show to friends as easily as you send them a news article today. Narrowcasting, via video blogs, could go big-screen. And you could have an unlimited flexibility in paying for services: Rather than three standards of cable service (basic, deluxe and gold, for instance), with IPTV you could pay just for particular channels.

SBC Communications ( SBC) is the leader in this so far with its Project Lightspeed, but it has been faltering a bit lately. Verizon ( VZ) is gaining more attention with its own version, called FiosTV. Technology heroes are likely to be a small semiconductor company called Sigma Designs ( SIGM), which has a big head start on the bits that make this work, and set-top box maker Scientific-Atlanta ( SFA).

4. Rally Will Narrow, Then Fade

A theory of Lowry's Reports chief Paul Desmond is that bull markets typically last 39 months and tend to benefit an increasingly thinner group of stocks as most stocks begin to sink into their own private bear phases. Dating from October 2002, this one is now nearly 36 months old, and you can already see how much narrower its breadth is now than before. Through Monday, 244 of the 500 stocks in the S&P 500 were trading under their 200-day moving averages, the dividing line between bull and bear phases for a stock, and 330 were trading under their 50-day moving averages. That means about half of the index is already easing into hibernation, if the trend continues.

Meanwhile, 22 of the 30 Dow Jones Industrials are trading under their 200-day and 50-day moving averages -- meaning three-quarters of the Dow stocks are already in bear mode. Desmond notes that at a market top, typically only 10% of the largest stocks are actually at peaks. As a result, he notes that in the final phases of a bull, investors will have the most success with nondiversified portfolios that concentrate in the most successful sectors; in this case, that means energy and utilities.

In summary, moving into the fourth quarter of this year, investors will need to be even more on their toes than usual, and be willing to take what the market gives them. Here are 20 stocks that our StockScouter system still likes; all have been among the most successful stocks already this year, and are still in bull phases. If the market does continue to narrow and roll over, these should be among the last to fade -- though, inevitably, fade they will.

20 StockScouter Ideas for Q4 2005
Company Name 9/25 Price Mkt Cap Industry name Rating
Chesapeake Energy (CHK) 36.24 11.3 B Indep. Oil & Gas 10
Ultra Petroleum (UPL) 50.85 7.6 B Indep. Oil & Gas 10
PetroQuest Energy (PQUE) 10.15 473 M Indep. Oil & Gas 10
Spinnaker Exploration (SKE) 64.12 2.1 B Indep. Oil & Gas 10
SanDisk (SNDK) 45.1 8.1 B Memory Chips 10
KCS Energy (KCS) 25.93 1.2 B Oil & Gas Exploration 10
Lone Star Technologies (LSS) 57.89 1.6 B Oil & Gas Exploration 10
ACADIA Pharmaceuticals (ACAD) 10.96 255 M Biotechnology 10
Neoware Systems (NWRE) 15.09 242 M Networking Devices 10
XTO Energy (XTO) 43.7 15.3 B Indep. Oil & Gas 10
Alcon (ACL) 128.22 39 B Medical Instruments 9
NetEase.com (NTES) 87.71 2.6 B Internet Services 10
Cabot Oil & Gas (COG) 47.5 2.2 B Indep. Oil & Gas 10
Mitcham Industries (MIND) 10.46 95 M Industrial Equipment 10
Pioneer Natural Resources (PXD) 53.96 7.7 M Indep. Oil & Gas 10
Companhia Vale Do Rio Doce (RIO) 43.79 31 B Steel & Iron 10
Noble Energy (NBL) 46.53 8.1 B Indep. Oil & Gas 10
Broadcom (BRCM) 45.52 15.1 B Semiconductors 10
BG Group (BRG) 47.89 33.7 B Oil & Gas Pipelines 9
24/7 Real Media (TFSM) 6.22 268 M Internet Services 10
Source: MSN Money
Jon Markman, writer of TheStreet.com Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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