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….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.