The final two weeks of the year will bring a light volume of news. When bad news is absent, the stock market tends to do well. Next week, traders will leave early for the Christmas holidays, and between Christmas and New Years, stock market activity is usually bullish.

YESTERDAY'S MARKET:

Despite the news of consumer prices dropping, the major market average closed down for the day. Had it not been for Altria adding 23 points to the Dow, the market would have finished even lower.

The bottom-line here is the market indexes are hitting four year highs, and traders are looking to lock in profits. In addition, the smart money knows that economic reports suggesting that manufacturing activity is growing, while inflation remains mild, is at best a suspect reading of what痴 really going on.

The key to a powerful year end rally rest squarely on the price of energy. Gasoline prices have rebounded slightly in recent weeks, and this does not bode well for the economy. If energy prices can continue to soften, we may get a decent rally into year-end and early 2006. If not, the ballgame may be over.

THE JANUARY EFFECT:

One of the positive developments for the "January Effect" is the sell-offs in the foreign markets. The cash generated from profit taking in the foreign markets will eventually have to be reinvested somewhere. In all likelihood, the redeployment of that cash will benefit the U.S. stock and bond markets.

The choppy action that we have witnessed in December was basically a consolidation effort to work off some overbought excesses. The S&P index has held its support at the 1240-1250 level, and this is good news.

The S&P is not alone in its impressive action; the Dow reached overbought levels in November, worked off some excesses in December, and is poised to make a run for the 11,000 mark by year-end.

The NASDAQ is technically the most impressive market thus far. Wall Street loves to run to they areas of the market that are the most hated, and the NASDAQ has been one of those areas.

As an example, in 1997-2000, gold was called a worthless commodity, as central banks around the globe were dumping the Midas metal on the open market. After bottoming at $220/ ounce, gold has rallied $300/ ounce for a gain of 136%.

Another classic example is internet stocks. For those of you who follow the Internet Holders (HHH), you'll see a classic example. During the tech and internet craze of 1999-2000, the HHH holders hit a euphoric high of $191 in March of 2000, and came crashing down to a low of $17.88 in July 2002. Since hitting the bottom in 2002, the HHH has skyrocketed 51 points for a gain of 285%.

The NASDAQ seems to be following a similar pattern to gold and the internet index in that the most hated, becomes the most loved. The NASDAQ is the only index of the major three (S&P, DOW, NASDAQ) that has not erased 50% of its bear market losses from 2000-2002.

If the NASDAQ does begin to make up for lost ground, we could see a rise to the 2500-2600 level next. In addition, many former high flyers from the NASDAQ have been removed, and new stocks have been added. Of the three major indexes, I feel the NASDAQ and the best risk/reward ratio.

CONCLUSION:

Playing a year-end rally from these levels is a speculative venture. Personally, I would rather sit this one out. I may dabble a little just for kicks, but I would rather begin adding to my short positions on rallies by using the Rydex Tempest 500 (RYTPX), and possibly the Rydex Inverse Dynamic Dow 30 (RYCWX).

You may have to wait a few months before the market begins heading south, so the best approach to buying a "bear" fund is to dollar cost average. If energy prices continue to march higher, you may not have to wait long for the bear market to begin.