By Brian Hepp

While all of us would love to be able to predict what will happen with our investments, the market reminds us that it has a mind of its own. However, as we look to the future — specifically to the new year just around the corner — we can use certain guidelines to help us at least get an idea of where the markets appear to be headed. By paying attention to these indicators, we can make educated decisions on where to place our investment dollars.

One way to gauge the market and its trajectory is to be aware of the trends that are currently in place for the market and the economy. It’s worth noting that even though we’re focusing on the market, we also have to consider the state of the economy as well. Trends for the economy, corporate earnings, inflation, interest rates and a host of other factors all help control the market. So rather than trying to predict something happening that is not already in play today, it’s best to stick with the trends in place as we look ahead.

For example, the current recession in the building industry has, in part, led to slower economic activity in recent months. Interest rates were on the rise for two years, but the Fed halted its rate hike cycle in June of this year. Also of note, the market has been rising overall for 50 months now, compared with a typical bull market average of approximately 25 months. So what do these trends tell us?

The trends indicate that the economy and the stock market should perform okay in 2007. That may not sound like a highly technical term to describe it, but with the information we can glean from the trends mentioned above, it appears that while we’re not on pace to see a huge upward swing in the market, we probably won’t see a major decline either.

Beyond the general market direction, as an investor you also want to know which areas of the market might provide favorable investment opportunities. Investors should always consider investing in sectors of the market that may be in a position to do well going forward. Based on the expectation for a slower growth economic environment in the first half of 2007, our market professionals currently recommend investing in the more defensive health care and consumer staples sectors.

As for your current holdings, if you happen to own companies that are weak in their respective industry, this could become a bigger risk when the economy slows. You may be better off buying and owning strong companies that have pricing power and dominant positions in their industry. But how can you identify these companies?

Interestingly, some of them may be right in front of you. Think about the products you see on the table at holiday gatherings or at bowl game parties — brands that are widely known and accepted. These companies are usually quite profitable because they have good control of pricing. It’s always possible their business may slow down a little with the economy, but they’re likely in a position where they won’t fall off entirely.

The hard part to making good picks is that great companies don’t always translate into great stock investments. When the market recognizes a good company, its stock price tends to move to a valuation that doesn’t offer an attractive risk/reward tradeoff. However, in the current environment, you can look for — and take advantage of —opportunities to buy great companies at reasonable prices.

For more information about the outlook, the 2007 Investment Guide from A.G. Edwards is available on my Web site, agedwards.com/fc/brian.hepp, or by calling my office at (310) 453-0077.