Tel Aviv Stock Exchange indices are closing out the year at record levels but analysts are split as to whether after four years of double-digit returns and with a slowing US economy, the year 2007 will mark the end of the market rally. "After four years of dual-digit returns, 2007 should be a cool one for investors, if you take into account the expected economic slowdown in the US, which will affect the local economy and the potential threats on the security situation such as Iran and Syria," said Orly Elad, head of the Capital Markets Research and Advisory Unit at First International Bank of Israel. "On the back of strong macroeconomic data, despite the war in the North, the stock market is poised to post positive returns in 2007, though they may be lower than the returns we have become accustomed to in recent years". Rounding out the year, the Tel Aviv-25 and the TA-100 indices approached the 950-point threshold as the Fitch credit rating agency upgraded Israel's economic forecast from "neutral" to "positive" this month. Daily trading in Israeli stocks jumped to another record in 2006 to NIS 1.45 billion from NIS 1b. in the previous year, despite the war, according to the the Tel Aviv Stock Exchange's annual report published on Wednesday. The TA-25 index rose by 13 percent in 2006, compared with 25% in 2005. Market analysts and strategists, on average reckon that the main Tel Aviv indices could rise by 10% and reach at least 1,000 points in 2007, but not much more, signaling a cautious outlook that the upward momentum on the Tel Aviv Stock Exchange is slowly decelerating. FIBI equity analysts predict that the TA-25 index, will generate 4% to 6% returns for investors next year, after leaping by over 143% over the last four years. The bank's analysts foresee the TA-75 index generating between 6% to 8% returns in 2007. Meanwhile, analysts at Union Bank and Bank Leumi think the rise in the stock market indices in recent months may reach their peak at the beginning of the new year. "Market momentum is expected to remain positive until the end of the year," said Union Bank. "However, toward the beginning of the new year, we recommend establishing defensive positions in light of the extended run-up in world markets." Bank Leumi also believes the rally on the TASE is coming to an end and cautions investors to protect their portfolios from a drop in the market. "In light of the price level of the market and in spite of the good macroeconomic data, in the short-term, we see the need to protect portfolios from falling shares or instead reduce the exposure to the local market by realizing gains." FIBI also recommends that investors be more selective in 2007 ahead of the widely anticipated economic slowdown in the US, which will impact the rest of the world, and especially Israel. "We recommend focus on more defensive first- and second-tier stocks in specific sectors, such as the defense industries because of the constant need to replenish military reserves, which is not affected by the anticipated slowdown in the US," said Elad. "The 'green energy' sector is another strong sector in 2007 because of tax breaks and laws that are increasingly forcing a focus on alternatives to fossil fuels." Nevertheless, despite steep gains by the Real Estate-15 index in 2006, Elad still sees potential upside in real estate companies that operate in the Far East and Central Europe, as well as in emerging markets. Painting a more bearish picture, Yair Alek at Axioma Investment House predicts a downward trend for the stock market next year. "2007 will be a bad year for the local and global stock markets, which are expected to reverse course and head downwards," said Alek. "After a long time of prosperity and with the expected downturn in the US economy, the market will start to fall. Investors understand that the risk level in the local market, which is not cheap, is growing." Alek noted, however, that in the short-term the local market might still experience an upturn before reversing the trend and falling to between 800 and 850 in 2007. Similarly, Direct Investment House, but cautioned that although macroeconomic data and corporate results are expected to continue to be positive in 2007, there were clouds on the horizon. "In the short-term, we see some potential for a continued rise in the stock market, but there is no doubt that the risk level for investment has increased and investors need to be careful and more selective," said Ilan Artzi, vice-president at Direct Investment House. "On the one hand, share prices are not as cheap anymore after four years of continued rises, while on the other hand, the majority of companies are not expected to present significant improvements in their results as they have over the past three years." Artzi added that the behavior of foreign investors, who have become dominant players in the market, and the potential deterioration in the security situation in the North or South, were the other two factors for concern and caution. "If foreign investors decide to reduce their exposure to Israel because of an interest rate increase in the US or volatility in emerging markets, the stock market can expect to be hurt," said Artzi. "Thus we advice investors to consider to disperse part of their investment portfolio into the global markets." Richard Gussow, senior analyst at Excellence Nessuah, maintains that although valuations on the market are a bit stretched, the market is not overvalued. "The market is not cheap, but it is not overvalued so investors will need to be very selective," he said. Gussow's stock picks are Makteshim Agan and telecommunications giant Bezeq following its turnaround story and anticipation of a high dividend. Analysts also believe there could also be more joy for investors in bank, chemicals, medical and defense stocks. FIBI and Direct Investment House both like Bank Mizrahi and Chemical Industries, while Gaon Investment House's stock picks are Elbit Systems, Ilex Medical and Kardan on the back of their continued expansion into Eastern Europe.