From a Contrarian View – 2007 Predictions

12/22/2006 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Expert market watcher Bernie Schaeffer recently made some intriguing predictions for 2007. Here, he offers a contrarian view of the market, commodities, the dollar, and hedge fund activities that may portend significant opportunities for investors.

"My sense is that many investors begin to pile heavily into the sectors they've "missed out on" in December and into early January. This translates into a washout in sideline buying power for these sectors and makes them very vulnerable to sharp pullbacks or to actual tops.

"So (to coin a phrase from the great Humphrey Neill and his Art of Contrary Thinking) "it pays to be contrary," especially at year-end. With this in mind, here is a list of potential contrarian surprises for 2007.

"A huge stock market rally - Yes, Wall Street strategists are bullish, but their bullishness is a mile wide and an inch deep as reflected in their very modest targets for the various stock-market indices. This cautiousness is of even greater significance given the flat-out bull market in the second half of 2006. So a runaway bull market would be a major contrarian surprise.

"A surge in the dollar - There has been a major climax in bearish media pieces on the dollar this month, capped by the bearish cover story in the December 2nd issue of The Economist . (This same magazine sported a bearish dollar cover that was concurrent with the major dollar bottom in 1995.)

"A plunge in precious metals and crude oil prices - This would be consistent with a surge in the dollar. But a compelling contrarian case can also be made from the widespread sentiment that the weakness in energy and precious metals prices since the second quarter is a "pause that refreshes" in an ongoing commodities boom, rather than a sign of a potential top as well as the huge fund flows into these sectors.

"A continued erosion in volatility - The consensus that volatility will quicken in 2007 is shared by bulls and bears alike. A huge shock would be a move by the CBOE Market Volatility Index (VIX - 10.60) into the single digits that is more than temporary and that is accompanied by an ongoing rally in the stock market.

"A hedge fund "bust" - A huge stock-market rally plus a possible dollar surge, commodities bust, and moribund volatility are not exactly a recipe for strong hedge-fund performance. I'm not necessarily looking for busts of the Amaranth variety as much as a slow bleed of underperformance that will leave investors disillusioned with this asset class and ultimately to the shuttering of hundreds of marginal operators."

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