Have you seen the following chart? At a mathematical correlation of 0.79, it is scarily high. How much time do we still have before the bottom falls out? Or is it going to be a bullish 2007 with a great 4-year cycle election? With so many bulls arguing with 4-year election cycle, maybe this argument is a sign of desperation. Just some food for thought.
I think it is safe to say that there will be great uncertainty in 2007 due to the unfolding slowdown in the housing market. I would say, RUN at the first sign of a significant market correction. I am putting 2007 as another dangerous year like 2000 if not more dangerous due to the size of the current housing bubble. But I also think it is possible for Fed to work 24/7 already, blowing up commodity market, buying up treasury bonds & GSE bonds, to postpone the unfolding crisis to 2009. When the high-tech bubble bursted in 2000, Fed simply created another huge housing asset bubble to replace it. I cannot really imagine what would turn out eventually. The next wave of money flow is simply going to be bigger for sure.
Make sure you read the counter argument by Mark Hulbert for refuting the following chart. I agree with him completely.
