What to look for in 2006?

In 2005 the market barely moved. The S&P500 gained 3%, the Nasdaq a mere 1.37% while the Dow edged down 0.61%. As some analysts have already been saying the bull market that started in 2003 is aging. And I kind of agree. Although there is a lot of optimism for 2006, it may end up being no different than 2005 or even worse.

Heading into January I feel the market may become bearish. Right now all the major indexes have dipped to around their 50 day moving averages. That actually looks to be a good support if the market would bounce back (nonetheless, since volume was quite thin because of the holidays I don't think that such support is reliable). But I suspect that would happen. I don't see any major driver for the market on the positive side except that the Fed may stop raising interest rates. But that seems to have been already priced in. All eyes would be on Bernanke's policies and until the market clearly understands his stance it would be weary to make big moves on the upside. So far Bernanke has been perceived as all positive and there have been no jitters in the market. But the market has yet to see him in action. I am sure there will be surprises for the market and the switch from Greenspan to Bernanke may not be a very smooth ride.

So my take is before going up we are going to first go down. I would say we are looking at atleast a 5% correction. It is hard to predict how long this correciton may last, but it could go on for a few months. So if investors jump in too soon in January they may get burnt and may have to wait for a while till they can see some returns. Especially watch out the techs. The technicals on those stocks have gone a bit bad recently.

For me I am going to play safe. I have already got out of all of my speculative trades. I am only holding my longterm commitments. It is not that I am going to stop trading. But whatever I will do I will watch every move of mine very carefully and step back if things go wild.

Having said that I still do think that there are some industries and stocks that could make you money. Right now one industry high on my list is Natural Gas. Natural Gas has dipped in the end of December after making a record touching $15 per million BTUs. According to a report the U.S. National Weather Service had said for the last week of December that demand for heating fuels could be 25% below normal, with natural gas heating demand almost 28% below average, as most of the country will see unseasonably mild temperatures. That triggered a selloff and Natural Gas prices dipped to 4 month lows before recovering a bit at the end of the week. I feel this bearishness may last for sometime during which time there might be good opportunities to enter the Natural Gas plays. My favourites are

Chesapeake Energy (symbol:CHK)
X T O Energy Inc (symbol:XTO)
Canadian Natural Res Ltd (symbol:CNQ)
Devon Energy Corp (symbol:DVN)

You may see some of the small firms being bought out by the big oil companies like Exxon, BP, Shell etc., which are desperately looking out to increase their reserves. So potentially an investment early on may become quite rewarding. But a note of caution though is that these stocks tend to be very much news driven like the Biotechs and one needs to follow the stocks pretty carefully and do good research beforehand.

More to come later! Stay tuned!