IF PAST IS PROLOGUE….

Past is prologue….At least that’s what strategists at CitiGroup are saying.  In a recent note they highlighted the 3 past market environments that most closely resembled the current environment.  If past is prologue then Citi is working under an incredibly contrarian framework.  Unlike just about every investor in the world right now (and every other analyst), they believe January and 2011 could have some surprises in store for us:

  • Over the course of this year we have constantly referred to what are the only 3 overlays that we think fit with the present price action in the equity market.
  • Our favourite for some time has been the “spooky chart” of 1929-1939, which we have been watching since 2003.
  • A very close 2nd – but fast becoming a potential number 1 choice has been the overlay of 1966-1976.
  • A relatively distant 3rd has been the chart of the 1906-1909 period
  • It is these charts that have led us (As per our charts of Christmas) to surmise that 2011 will not be a good year for the Equity market, just as all 3 suggested that 2010 would not be a bad year.

Bottom line: Our favourite overlays suggest for the DJIA.

  • The peak may be posted as early as the opening days of January 2011 (possibly even 3rd January as per the other 3 examples) with a down month in the region of 5%.
  • We will see an intra year bear market next year (fall of over 20%).
  • We will close the year down double digit percentages (Plus/minus 16% down).
  • We could be waiting a further 6 to 8 years to eventually see the DJIA regain the 2007 highs on a yearly close basis.

What will the catalyst be???

Our bias is likely 1 of 2 things.

  • The bond market falling sharply as it did in 1977 sending yields higher and fuelling inflation or supply fears or both.
  • Europe imploding. While this could stress our view on the dollar fixed income and commodities, this dynamic still supports our bearish equity view.

Now there’s a contrarian analyst report from Wall Street for you….

Source: Citi

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:
TwitterLinkedIn

  • Dan Dell

    Well this fits perfectly with my personal bias. I didn’t want to take off my shorts yet anyway… too lazy I guess. Or too stubborn. Guess I need my face FULLY ripped off in 2011. I never liked odd numbers anyway.

  • Andrew P

    We just don’t have years like that in the third year of a presidency, do we?

  • kman

    surprise, but another bearish comment from me.

    I’m thinking 2011 will surprise negatively simply bcause .

    1. I haven’t heard this much homogenity on employment picking up and the future will be bright, the recession is over, all things sunshine since 2007.

    2. Employment is not really picking up enough to make a dent.

    3. Europe and China
    4. Wehn u combine the above with high commodity prices (oil especially) you get trying times for struggling people.

    But Merry xmas Pragcap…it’s wintery white outside with more to come (minus 21 degrees, right now). I think it’s the start of a new ice age, just when we were getting all cap and trady bout global warming :-) whats that term…….man makes plans, God laughs.

  • Brandon Ferro

    I would add that through historys various secular bears, there have been 7 cases of the market posting 2 straight up years and in only 1 out of the 7 following third years did the market post gains. Instead, in 6/7 of those third year instances the market fell – ironically the average decline in the third year was 17%, right in line w/ Citis average in the table. The one three year up sequence had gains of 5%, 4% and 15%, less bullish than the two past years we have had, also arguing that we have already overdone it….

    My personal trading plan for the year is to fade any initial year strength as a result…

    This is a great table for someone as interested in cycles as me…..thank you.

    The one caveat is that we have NEVER had a central bank EXPLICITYLY targeting higher stock process, much less global central bank asset price pumping in unison. Could this time, for the first in history, be different? You know it is a more legit question than it has ever been….

  • http://www.marketoracle.co.uk/UserInfo-Akhil_Khanna.html Akhil Khanna

    The stock and commodities markets are in the firm grip of Too Big To Fail Operators who manipulate the prices to extract maximum profit for themselves while making the rest of the population miserable. They are using the electronic exchanges a medium to transfer wealth from the middle class and the poor to their own bank accounts. The prices quoted on these exchanges are a result of long and short positions outstanding and do not reflect the true ground reality of the economy for a major part of the world population.

    The population in the developed world are suffering due to the hangover from excessive borrowings from lenders who lent to anyone on the street to maximise their own bonuses.

    http://www.marketoracle.co.uk/Article24581.html

    The problems have been compounded by Outsourcin­g and Rampant Speculatio­n allowed in all the exchanges. The problems are hereto stay as till date no one in the political arena has even acknowledg­ed the problems let alone find solution to them.

  • pas

    Yup, I guess you could be worried if you’re into the DJIA. But take a look at the Nasdaq 1977 to 1980. 1977 opens at 95.54 closes out 1980 at 202.84. Up over 100% in 3 years. No flies on that.

  • Cowpoke

    Good post TPC, I was thinking along these lines yesterday as I recalled the late 90’s internet boom/bust. It seems that times are just like then when everything just went up.

  • K

    I don’t understand why the Fed does not buy the futures on the Nasdaq, if the intent is to keep stock prices high.

    Why bother with buying the bonds and printing an editorial as to why the stock prices went up etc?

  • B Ferro

    Excellent point! And it would take a lot less in NDX futures to achieve the same goal vs. almost $3T in bonds over 2 years!

  • Moose

    I hate it when I agree with an entity that I detest to the nth degree!

  • http://www.claassenresearch.com Matthew Claassen

    The January 1910, 1940 and 1977 highs were all secondary highs; they were the peak of the first rally AFTER an initial decline. That is very different than the current situation where a January high would or could be THE rally high. The S&P, DJIA and NASDAQ are all at rally highs.

    I too expect a top of some form and a multi-week decline starting in early January, but the Citi comparisons fall apart when it suggests the performance following past secondary January high’s should equate to intial corrections from a rally high.

    My two cents

  • ES

    But in any of these markets did we have a central bank that practically took over the governing of the country? We can easily predict what FED will do if things don’t go their way – QE 3,4,5. It might be enough to keep up the appearances and keep the markets afloat .Sort of like a Potemkin village, everything will keep looking fine until rain starts and washes away the pretty painted pictures of our economy.

  • Edward

    I wish this had been kept quiet. Now everyone will flip short in January and the markets will rally. The only hope for shorts is a breakdown BEFORE January, i.e. next week. Otherwise, February will be it.

  • Humblepie2008

    If this means anything at all:

    03 Jan 1910, Monday
    03 Jan 1940, Wednesday
    03 Jan 1977, Monday
    03 Jan 2011, MONDAY

  • goodfriend

    i like the conclusion since i’m short biased yet those type of exercise, unless accompanied by some macro analysis is like reading future in chicken entrails to me

  • J Dukate

    True we “normally” don’t have a bad year in the third year of the presidential cycle. Year 1 and 2 are the worse performing. In otherwords if you were going purely by the presidential cycle 2009 and 2010 “should” have been down years!! But they were incredible “up” years breaking all records. So if the presidential cycle did NOT work for the first 2 years why assume it will be consistent for the remaining 2 years? Commonly used indicators during bear market cycles usually flip. Don’t count on the presidential cycle for 2011 or 2012. Its broken!!

  • http://www.peterdag.com Peter Dag

    The trend is up until is broken. This is the only true statement in forecasting.

    People can fit statistics the way they want. And I am saying this with a lot of humility. The above comments prove my point.

  • http://www.markettrak.com Rich

    The difference today is that money market rates are near zero and earnings/dividends are pretty good. My stock safety index has never been higher than it is today. See: http://www.markettrak.com/safety.html