Critical Market Juncture: Year-End Rally or Crash?

Today there were some very divergent opinions on where the market is heading into the end of the year as this Bloomberg article notes.

In the "market goes up corner" ...

Strategists at Goldman Sachs Group Inc., Strategas Research Partners LLC and UBS AG say the Standard & Poor's 500 Index will climb 9.7 percent from its Nov. 16 close to 1,600 in the final six weeks of 2007, the steepest gain since 1971.

Why?

They say low equity valuations, overseas growth and the prospect that the Federal Reserve will cut its interest rate target for overnight loans between banks can lift the S&P 500 to a record 1,600 this year.

In the market goes down corner" ...

This month's drop in transportation stocks suggests equities may decline instead. With FedEx Corp. and Ryder Systems Inc. leading the Dow Jones Transportation Average to its lowest level this year, the rest of the U.S. market may slump too, according to the 123-year-old theory that says truckers, railroads and airlines lose business before the economy slows.

``The transports have broken down,'' said Jack Ablin, who oversees about $52 billion as chief investment officer at Harris Private Bank in Chicago. ``We're going to need a boost on the economic front to really help push the market higher. I wouldn't bet on it.''

Why?

Losses triggered by bad home loans may cause banks, brokerages and hedge funds to cut lending and threaten to trigger a ``substantial recession,'' Goldman Sachs Chief U.S. Economist Jan Hatzius wrote in a Nov. 15 report. Macy's Inc. and J.C. Penney Co., two of the nation's largest department-store chains, slashed their estimates last week before the holiday shopping season.

Who's going to be right?

``Transportation is a good economic indicator,'' said Richard Weiss, who manages more than $59 billion as chief investment officer at City National Bank in Beverly Hills, California. ``We're holding off in our investment strategies until we see better values out there. That's not going to happen until 2008.''

Until the DOW closes under 12,845.78 (Aug. 16 close) technically we are still in a "BULL" market according to Dow Theory. The next Fed meeting is on Dec. 11. Fed Futures have already priced in a 90% chance of a .25% cut. However, some are saying a cut is not in the works given the impact it has on the commodity prices and hence inflation. Bear Sterns Chief Investment Strategist, John Golub, says that the Fed is done cutting and that the failure to cut rates on Dec. 11 will result in a STEEP sell off in stocks. According to Golub:

" Equity prices will fall after the Fed's decision because investors expect policy makers to reduce interest rates to contain credit-market losses, he wrote. Shares of financial firms, technology companies and raw-materials producers may decline the most, while utilities, health-care companies and makers of household products will outperform"