Winding Down with an Xmas Rally

Here we are beginning the final 2 weeks of the year.

The economy continues to limp along, improving, albeit rather slowly. “Recession fatigue” is likely to make this holiday consumption spree appreciably better than the past 2 years.

Markets have looked a bit tired — and yet — every opportunity to see big whackage has been met by liquidity driven buying. The bid beneath equities remains firm. The bias remains firmly to the upside.

With this year all but over, traders are starting to turn their attention to 2011. Corporate profits appear to be strong, but headwinds include unemployment and real estate. I continue to expect further contraction in RE prices, and my participation in the Case Shiller survey reflects that.

Rotation out of bonds is a major source buying buyer, following 18 months of main street preferences for fixed income products. It is ironic that mom and pop were Treasury buyers during what is likely to be the last gasps of a 30 year bull market in bonds.

Talk about late to the party!

History shows us that the public tends to be the last in. From the shoeshine boy in the roaring 1920s, to buyers of the Nifty-Fifty in the Sixties, then dot com stocks in the 1990s, and once again with bonds in the 2000s, main street joins Wall Street when their greed overwhelms their better sense. It is sad but don’t blame me, I am only pointing out this truth.

Don’t be surprised if the public’s rush into commodities marks that as a top, as well — including Gold.

This is a holiday shortened week — markets closed Friday for Christmas — so we could see some interesting action. The week after are little more than rookies manning the terminals, thin trading, and last minute position closings.

Around this time of year, I like to ask traders and investors the following: What is your plan for next year? What have you learned from your mistakes, what did you do right? (The 2009 Investing Mea Culpas were well received; Look for my 2010 mea culpas next month)

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