If you have been keeping up with my journal comments, you know that I think 2006 will be a tough year. Energy prices have come down a little in preparation of a slowing economy. In 2006, energy prices will come down even more.

In 2006, if not sooner, consumer spending is likely to slow as increased energy costs, higher interest rates, and a slowdown in the housing market begin to weigh in.

That aside, the stock market looks prepared to make its next move, and this move, will likely be up. On the surface, the year to date performance of the various market averages have been unimpressive.

Year to Date:

S&P 500 +1.4%
NASDAQ +.52%
Dow Jones -.52%

This year is a prime example of why sector investing beats index investing by a wide margin. Some of our research has revealed that in 2005, sector investing has outperformed the market significantly. We are in the process of publishing our data, and hope to have a newsletter available to subscribers in 2006.

In 2005, there have been pockets of opportunity for traders, and traders have outperformed long term investors thus far. Traders are investors who buy on dips and sell on rallies, while the typical long term investor has a minimum time horizon of 5 years, and owns a set portfolio of stocks or index funds.

As an example, the trader who bought into the market in August of 2004, and sold on the rally in March 2005, showed gains of about 15% in less than 150 days. If the trader had bought back in after the 2005 spring dip, and sold in August, he would have gained a little over 9% during that period.

So, in 2005, the investor who had allocated their portfolio among the Utility and Energy sectors did quite well. Other sectors in the S&P were lackluster at best.

Not all markets performed as poorly as the U.S. markets. Foreign stock markets and international funds had a great year. For example:

German DAX +19%
France CAC +18%
Swiss SMI +27%
Japan Nikkei +23%
Korea +41%
Brazil +15%
Mexico +25%
Argentina +19%

Usually, when you see outstanding performances in the foreign markets, and lackluster performance in the U.S. markets, investors like to take profits on the gains, and re-allocate those assets elsewhere. My feeling is this elsewhere will be in the U.S. stock market.

What is encouraging in recent weeks is the strength of markets advance despite negative news. I am still focusing on the 1250 mark on the S&P, 10,750 level on the Dow, and 2250 level on the NASDAQ. If the markets can overcome these key resistance levels, we will get the last hurrah that we have been waiting for.