For those of you who are football fans, you'll enjoy this analogy. As a young college baseball coach, a few of my buddies were football coaches. One of my best friends eventually became a head football coach in the Southeastern Conference.
After we finished with practice, I would zip off over to the football practice field to catch the final few minutes of football practice. At the end of every practice, the football team would work on the "two minute drill".
The drill is really fascinating to watch. The "two minute drill" is an offense a team incorporates in the final two minutes of the game in hopes to score a touchdown and win the game.
What is really fascinating about the drill, is how rapidly the offense moves the football from one end of the field to the other in a very short period of time. Being the inquisitive person that I am, I asked my coaching friend why teams didn't use the two minute offense the entire game. Boy, if they can move the football 60 or 80 yards in less than two minutes, think how many points they could score if they used it the entire game.
My friend did tell me that more points are scored during the two minute offense than any other time during the game. Unfortunately, the drill is also dangerous because the rate of turning over the football is also very high.
Many are betting that Wall Street is getting ready to start its on version of the "two minute drill" in the weeks ahead. Maybe, they have already started, and the ball has been intercepted.
On Tuesday, the yield curve briefly inverted causing sell programs to kick in, and the Dow closed down 105 points. Many traders are still away for the holidays, but the period between Christmas and New Years is usually bullish. That's not what we have seen this time around.
Trading action has been very unusual. In fact, we have seen bullish action in the morning reverse course by mid day and fade into the close. This is not a good sign.
I have received my latest round of the financial publications that I subscribe to, and they are all saying the same thing. The December 26th issue of "Fortune" has a picture of gold bars on the cover. "Barron's" is yelling the bullish mantra from the mountain tops. "Financial Planning" has a cover story entitled "A Future Without Oil". CNBC today was touting commodities.
Invariably, all of these headlines are touting the best performing sectors for 2005. An alert contrarian knows that eventually the high flyers from the previous year eventually fall back down to earth.
An example of this would be real estate. The crack in the foundation has been found, and now its time for a slow decline that could take a few years to correct the excesses.
Long term, I am bullish on commodities and energy. But, I have been around long enough to know that a reversion to the mean is not out of the question.
In November, I wrote:
The Spin Begins
November 28, 2005
This morning I heard CNBC's Joe Kernan quote a source that said that 2006 valuations look very similar to those in 1995. He basically went on to say that if 2006 provided the same returns as 1995, the market could be up 30% next year.
Just a few short weeks ago, many were questioning whether the market had enough steam to provide investors with a year-end rally. Now that the market has broken through key resistance levels, euphoria in the market could be next.
According to UBS market strategist Peter Lee, the markets could be heading toward a major blow off in the weeks and months ahead. Peter is an excellent market technician, and he has gone against conventional wisdom more than once or twice.
The question that remains is should investors join in on the markets new found life, or just sit this one out. I guess if you are an aggressive investor, you could jump in on the markets the latest momentum, but the average investor may want to sit this one out.
At this stage of the market rally, the most prudent approach from here is the accumulation of cash. As we get 6-9 months into 2006, we will probably see significantly better buying opportunities.
Playing the final two minutes of the market ballgame may give you an adrenaline rush, but keep in mind that a turnover could occur at anytime.
TODAY'S MARKET:
DJIA: 10784.82, down 11.44
S&P 500: 1254.42, down 3.75
Nasdaq Composite: 2218.20, down 10.80
The market averages once again gave back early gains and finished lower. The Dow lost an early gain of 29 points and closed down 11 points.
Existing home sales fell to the lowest level since March also weighed on the market. A report saying that gasoline inventories dropped more than expected, allowed the price of crude oil to close above $60 per barrel.
Crude Oil $60.32 +.50
Gasoline $1.67 +.0544
Heating Oil $1.73 +.023
Nat. Gas 11.22 -.414
