Stock market outlook: If past is a prologue …

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At last a contrarian view! The report below comes from Pragmatic Capitalist.

Past is prologue … At least that’s what strategists at CitiGroup are saying. In a recent note they highlighted the three past market environments that most closely resembled the current environment.  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 three 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 one 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 to surmise that 2011 will not be a good year for the equity market, just as all three suggested that 2010 would not be a bad year.

Click here or on the table below for a larger image.

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 three 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 six to eight years to eventually see the DJIA regain the 2007 highs on a yearly close basis.

What will the catalyst be?

• Our bias is likely one of two 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.

Source: Pragmatic Capitalist, December 22, 2010.

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