During the typically worst period for stocks, the market has successfully persuaded shorts to cover, pulled cash off of the sidelines, turn market sentiment from bearish to bullish, and has driven the Dow to new all time highs. So, what do we think will happen in November?
1) Oil prices will rebound ($65-$70), and oil stocks will rally. While the U.S. temporarily postponed adding to the Strategic Petroleum Reserves, China was aggressively adding to their reserves. During this rebound, profits should be taken in energy and commodity stocks.
2) The stock market will sell-off on renewed talks of inflation, higher oil prices, fears of further rate hikes, a possible recession in 2007, and geopolitical troubles that were put on the back burner prior to the election.
3) After hearing word from the Fed, the stock market will rally in anticipation of the Fed lowering rates in 2007. Once the market sees that the interest rate cuts were too late to prevent a soft-landing, the economy and stock market will worsen. China will experience lower growth, and oil and commodity prices will form an important bottom. Cyclicals, Financials, and Oil should begin to be accumulated.
4) In the second or third quarter of 2007, the Fed will begin easing again. There will not be an immediate impact on stocks, but technology, industrials, and commodity stocks should begin to be accumulated.
5) Real estate will stabilize, but it will take some time to work off the excessive inventory build ups from the past five years. Since speculators have been burned, price increases will be moderate, and the NASDAQ type jumps in real estate values will not return for several years.
6) Late in 2007, the stock market will put in an important bottom, and a new bull market will emerge that could last 3-4 years.
