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What Market Will Do? All Depends on What Year It Is

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Finding the direction of the stock market may be no more difficult than knowing what year it is.

For those technicians who believe in the Decennial Pattern of market behavior, the averages have followed a pattern determined by no more than the digit in which the year ends.

That historically has meant bad news for years ending in one, like 2011.

“It’s actually that simple,” says Mary Ann Bartels, technical research analyst at Bank of America Merrill Lynch. “You go through the whole decade and just average up the performance of the market every year. Traditionally the ‘zero’ year and the ‘one’ year are bad years. The beginning of the decade starts out very slow.”

For years ending in one, the average return on the Standard & Poor’s 500 has been a loss of 0.9 percent since 1931. It is the worst performer of the 10 digits that span the course of a decade.

Bartels isn’t convinced the market is following a Decennial Pattern this year but is watching for support levels to be breached indicating the S&P is trending in that direction.

The best performing year, though, has ended in five. In fact, there has never been a year ending in five since the 1935 that has produced a negative result.

“As we progress through the decade the market gets better in the back end,” Bartels says.

So what does the number in which a year ends have to do with stock performance?

“No one has really written anything definitively but it seems to be that we get so hepped up at the back of the decade,” Bartels says.

Of course, chart-watching, as with history, does not always repeat itself. Those betting on the Decennial Pattern got burned in 2010, when past performance would have indicated a 0.3 percent drop but instead produced a nearly 13 percent gain.

“If it didn’t work last year, why should it work this year?” says Sam Stovall, chief equity strategist at Standard & Poor’s.

Bartels thinks the reason is that the market was under undue influence last year—primarily from a big dose of quantitative easing from the Federal Reserve that helped goose the markets but ended in June. The S&P 500 has lost more than 5 percent since the end of the second leg of QE, or QE2.

The market’s willingness to follow a Decennial Pattern is significant in that many of the highly bullish bets placed by strategists looking ahead into 2011 were figuring the averages instead would follow another pattern—the Presidential Cycle. That pattern stated that in the third year of a president’s term, the market usually gains at least 14 percent.

Those betting on the Presidential Cycle now will need to see the market gain about 12 percent to hit the bottom end of consensus forecasts of 1400 for the S&P, and about 16 percent to reach the predictions of those at the far end of the bull spectrum, such as Abby Joseph Cohen at Goldman Sachs who predicted 1450 by year’s end.

Bartels is looking at a 1250 close for the S&P as an important line to determine whether it’s a Decennial or Presidential year.

“Last year the markets did well because the Fed embarked on QE2. So that altered behavior,” Bartels said. “We were on track for the presidential cycle up to the month of May this year. We needed to break out to the upside and we didn’t. We broke down.”

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