Sentiment and year end rallies. Sentiment was down for 3 months until turning sharply higher over the past 2 weeks. Over the past 4 years this is not unusual in 4Q... that is what creates the year end rally, right? Negative sentiment means investors have been raising cash... turning positive means they are putting it to work. It takes more than a few weeks to complete the process.

In down years 2001 and 2002 the 4Q rally peaked in the 1st week of December. 2003 and 2004 peak last week of December. In each case sentiment had already shifted to 'too many bulls' by mid Nov and the market had ramped up from Oct lows. But those converted bulls had cash still to put to work so they chased stocks higher into December.

Many managers are behind the market AND overweight energy. I think that creates some interesting dynamics here as they rotate.

For example look at how the miners are trading in sympathy with oils. However look at the two in a reltaive price graph and it would appear that some of that energy money is finding a home in miners as an alternative commodity play.

Beneficiaries of lower gas prices such as consumer cyclicals- retailers, gamblers; maybe airlines aand other transports may continue to catch flows. I have a bias against financials but they look pretty good to someone. Anyone have ideas on sectors for rotation?

Bonds and gold are acting well as a hedge relative to equities. I doubt all 3 are moving up from here, but if you are long one then the other two may have a place depending on one's situation and/or benchmark.

Stockman-

I think that is a pretty fair analysis and shows a lot of perspective. The datapoint about sentiment is singular. What makes this different however are the host of pressures on market performance: interest rates, fiscal deficits, household savings deficit, housing slowdown. I too think the rally will continue into December and shortly beyond but the 2006 correction is likely to be sharp because of the above. I am also betting the Fed doesn't stop here but continues to 5.5%. When that becomes apparent the bloom will be off the rose for financials despite all the liquidity that's out there. Because I am not as nimble as you guys I am sitting this one out. If the market fails to correct my Plan B is..... well, I don't have one.

As far as sectors go I thought the bounce for DD was related to oil easing instead of just a bounce from a floor. (Although it may have been market-maker Bill's column!). Perhaps with AA as well but who is buying, China? As you know I am looking for an oil recovery but have a long term timeframe for it so my interest is just in a good re-entry point. I am an intra-month / intra-year trader.

If the fundamentals were worth a damn then airlines and autos would be a beneficiary of the drop in energy prices but I don't wish either on anyone. Except for the foreign autos of course. The US auto industry is dead. We are making funeral arrangements presently. Anyone who has owned a share of F or GM this year is invited to the wake afterwards. Look for F's earnings to go negative next year if they don't get relief. Trucking seems a better bet and perhaps trucking that is consumer related even better so look for consumer product distributors? I haven't followed what's happening with the rails.

Thanks for your contributions. I read all your posts.

MarkM-

Thanks. Reading my own note I may have sounded more bullish than I intended. 2005 appears to be shaping up much like 2001-2005 in regards to year end rally. However, that is not a reason to be chasing stocks here. Rather that is a reason to be scaling out into overbought conditions. I do sense that it is not urgent to move to cash, nor would I be shorting. I raised cash yesterday and will raise more today. I want to be at minimum equity exposure going into December. For that minimum equity level I am looking for areas which may outperform into year end. I agree that downside is much greater into 2006. As a result in my account which I cannot actively manage (401K) I am 100% cash and have been all year. Cash pays 3% today and the market is up what 2%? Adjust that for risk and cash is looking good. In 2006 I think cash outperforms again.

So that's a long way of saying sitting this one out ain't a bad idea!

In regards to Fed... 5.5%? If so, I think you better arrange for a larger funeral as we'll see many more fatalities than just auto makers. On second thought just bring in the heavy equipment and do a mass burial. (I have a dim view of the economy next year.)