an tSionna: Mid Decade Patterns

There has been a theory making the rounds that 2010 will look something similar to 2004 as far as stock market performance goes. That theory, which is most heavily associated with Oppenheimer's chief technician Carter Worth, goes along the lines that the market spent most of 2004 digesting the gains posted in 2003. The last decade's first bear market ended with the the beginning of the second Gulf War.

While I don't know if I completely buy into his analysis (chiefly because I think the economy is different now), I do think we may be back into the seasonal patterns we saw during those mid-decade years, 2004-2007. That is there was a strong tendency for stocks to experience a run-up of share prices into year's end, then go through some sort of topping pattern early in the new year. This was then followed by a decline that generally lasted into mid-year. Ultimately each of these years saw some some sort of bottoming process of varying length which ended with a rally phase into year's end. Those rallies were often in excess of 10%!

Why did it work that way? Here's my thesis. Each of those years was marked by OK but not stellar growth. Each also had some external outside event that gave markets an excuse to sell off. 2004 was a presidential election year for example. 2005 saw the world worrying when North Korea announced that it possessed a nuclear bomb. Eventually those issues moved off the front burner, the economy puttered along and most importantly Wall Street wanted to get paid! Yes that's right for most people in my business the only number that matters is what the markets print on December 31st of each year! The higher that number goes the more many of us usually get paid or at least not fired from our jobs! Everybody in my business has an incentive to see stocks higher into the end of the year. That's what happened in each of those years we've highlighted in the chart above. Probably not a coincidence!