No one really knows what is going to happen. After all, there's not a soul in the world who consistently  has that special, psychic knowledge of what events and turns of history are about to come, but there are some who seem to get it right at times. Oh sure, there are lots of folks out there willing to tell you that they know what the Stock Market is going to do through the rest of this year. These folks get paid big bucks to tell the world what they think is going to happen. But do they really know what they are talking about? The fact is, no one has a crystal ball, and no one in the world really knows for sure what the Market is going to do over the next two months. So what I am about to tell you must be taken with a grain of salt. I am going to share with you my own personal thinking on what is to come. Like I said, take it with a degree of scepticism because no one can get it right all of the time.

First, November and December are going to be good months for this year's Stock Market. In fact, I wouldn't be surprised to see the S&P at 1200 by the end of the year. There are lots of reasons why I think we are in for two more good months of Stock Market appreciation. One of the most important reasons has to do with seasonality. Traditionally, November and December are two of the best months for stock market gains. Money flows into the Stock Market during these two months are usually pretty high, as investors tend to look toward the coming new year for some sign of economic enthusiasm. We have just come through the months of September and October, which are often considered to be the worst months for the markets. After all, more stock market crashes and financial disasters have occurred in America' s history during these two months, especially during the month of October, than at any time in the past. Yet during this particular year, October has been relatively calm and uneventful. The October calm of this year bodes well for the Markets in November and December.

Another reason I like these two months ahead has to do with the Federal Stimulus. We are still in the early stages of the unfolding of ffederal stimulus's spending. This means that we can all expect rising profits ahead for most all companies listed on the NYSE and the NASDAQ. Almost every company on both exchanges benefits in some way from federal spending. This is why stimulus packages tend to work.

Added to these economic factors is the recent rise in the GDP. Right now, inventories in American businesses are low. This means that companies around the country are going to be busy for the next two quarters, restocking their various needs of all kinds. This restocking of the inventory process will add to the GDPs ahead. The third quarter GDP was just announced today at a preliminary figure of 3.5 percent. I expect the fourth quarter to be even higher. The consensus right now is that fourth quarter GDP will be lower than the most recent third quarter. I think that these lower expectations for fourth quarter GDP are wrong.  

Second, expect more Stock Market volitility during the coming months ahead.   In March of this year, the volitility index, or VIX,  hit a high of almost 80. Since that time, the VIX has slowly descended. This past week, the VIX hit its low for the year at 20. Then, suddenly the Market pulled back, and the ViX ascended to 27 again. This kind of behavior is not unusual in a NORMAL market. It was not normal to see the VIX at 80. In fact, it was down right unique. Yet, now that the VIX has returned to its near normal level of near 20 and begun fluctuating in a range,  this forecasts a more normal and acceptable volitility ahead. This means that the Market will be somewhat choppy, but in some ways more predictable. It also means that the time ahead will be a stock pickers market, rather than the kind of market that we have enjoyed up to this point: straight up from March. So, in the coming next two months, you should plan to select your stocks carefully. You should also pick stocks for a trade, and not just hold them for the long term. The reason for this is that the more volitility in a market, the more reason to invest for the short term. In fact, traders love high volitility in a market precisely because it provides them with the oportunity to buy stocks for a short term profit, and then short them for a profit on the downside. Take your cue in the next two months from the traders. Pick stocks that you can hold for a week or two, and then sell them for a profit. LIkewise, if your mindset is secure with the idea of shorting stocks, consider picking a few for shorting, and then buying them back at their bottoms. This is one way to make a lot of money in the Stock Market. Traders do it all of the time.

Third, expect a change in the sector leadership for the coming months ahead. If any one notion is true about the Stock Market, it is this. The Market leadership never stays the same. Since early March, energy, material and financial stocks have been leading the Market's way up. Technology stocks have also been big leaders too. In the next two months, I expect other sectors to catch fire and begin their move upwards. Industrials and the cyclicals seem good candidates to me for your consideration. While some industrials have already begun to move upward, I think a large number of others are about to demonstrate their acceleration to the upside. I particularly like  industrial stocks that have low debt. In this atmosphere of "de-leveraging," low debt on a company's balance sheet looks awfully attractive to many mutual fund managers. These big money investors are looking to inprove their performance into the end of the year. So expect them to look for quality stocks with low debt. I also think that in some cases, hedge fund managers will add some risk to their portfolios by choosing high beta stocks. In the case of the industrials, the stocks I like are companies like: X, MIT, GTI, and  F. I also like the producers of phone handsets like: AAPL, MOT, and NOK. Both RIMM and PALM are presently in downward retracements. I would not hold RIMM until it returns to the 50's in price. Watch PALM carefully, and buy it only when it begins to move up on high volume.

Fourth, in the next two months, watch the dollar for your clues of what is to come ahead. Currency investors are pretty smart cookies. They know when Central Banks around the world are in the beginnings of taking actions on currencies long before the rest of the investing world seems to have any idea of what is going on. If you see the dollar begin to rise preciptitously, start your exit from the Market. If you are a long term investor and you don't want to sell your stock positions, fine. The dollar's rise should be your signal  to buy put protection for all of your stocks. This will protect your portfolio from any pullbacks. I expect the dollar's rise to begin sometime in late December. This is when the Market, and particularly the currency markets, will recognize that the Federal Reserve is beginning to send messages to the world that it is serious about raising rates. The announcement of impending rate increases will be met with a downward trend in the Market for a while, but eventually, a return to more normative, but lower than usual, rates will be seen by investors as a good thing.

Fifth, gold will continue to be a good investment to the end of the year. I think gold stocks are in consolidation right now, but eventually, these stocks will begin moving upward again. I don't expect gold to move up in price significantly in the near term. In fact, right now gold is a crowded trade. So, it could pull back - perhaps even to the 960 level. If gold pulls back, buy it as it approaches 960. If gold stays above 1000 for the next two to three weeks, forget the pullback and buy gold stocks aggressively. You should be able to watch them run upward until about Christmas time.

Finally, keep an open mind and avoid ideological thinking in your approach to investing. Right now, policy makers in Washington are telling us a lot of things about taxes and their desire to lower the Federal deficit. You should keep in mind that policy makers have an agenda, and frequently produce spin to defend their viewpoints. With income taxes scheduled to rise on January 1, 2011, and a host of other proposed federal taxes waiting in the wings, the long term outlook for Stock Market investing is somewhat cloudy. As I have mentioned before in other articles I have written, policy makers often say a lot of things to make voters happy, but then soften their views and their attempts to tax in order to get votes. There is no doubt in my mind that our economy is fragile and cannot withstand the negative affects of more Federal taxes right now. Higher taxes will only mean more unemployment and slower economy activity. With unemployment at a twenty five year high, and with state and local taxes on the rise, policy makers in Washington need to understand that their jobs are on the line. Should they begin to soften on the rise of income taxes in 2011 and offer some incentives for small businesses to begin hiring, the Stock Market could respond with a powerful move upward in the early part of 2010. But investors should definitely watch what Congress does on this matter. A lack of change to the scheduled tax increases for 2011 will only mean a possible second recession for the US,  beginning in early 2011 and continuing into 2012. If this recession scenario in fact happens in 2011, investors will need to be nimble, and ready to turn their portfolios to cash, After selling, the path to riches for investors will be to take the approach of shorting their way to prosperity.

John K. Brackett, Ph.D.

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