Merry Christmas everyone, here's my yuletide pressie to you all :o)

The following is a bit of fun as much as anything, so have a glass of something smooth handy as you read, and don't take it too seriously.

A couple of years ago I bought a copy of John Mauldin's book 'Bull's Eye Investing', and a rollicking read it is too if you like that kind of thing (I have a healthy respect for JM having read his letters for a few years now).

Between pages 90 & 91 of that book is a fold-out table showing the S&P500 total return for each year from 1900 - 2001 inclusive. Anyone who has a copy of BEI will know that there's a LOT of information in that table!

Now then, I don't really practice TA in the way that most of you do here - you know, the stuff that requires effort. What I do is pore over charts and tables looking for repeating patterns. And they are there, if you look hard enough. Combined with a healthy respect for company fundamentals it's proven to be (so far) a fun and fairly successful way to play the markets.

Anyway, as I stared at the table in BEI it occurred to me that there is a repeating pattern in our indices, and I've been keeping an eye on it for a couple of years now. The pattern essentially maps the 1929 bear market onto the 2000 bear market. An uncanny (to me anyway) correlation begins in 1922/1993 and predicts a roughly flat (+1%) market in 2007. Lo and behold, the markets appear to be closing out the year flat-to-slightly-positive. Incidentally, I'm using these S&P500 patterns as a proxy for the FTSE100, since these days they pretty much move in lock-step. So whatever the pattern predicts for the S&P I'm assuming will equally apply for the FTSE.

I'll get around to the numbers in a sec, but just to say that things appear to have been a bit more volatile 80 years ago than they are today. Best fit is achieved, therefore, by multiplying the 1929 set of total returns by 0.6, as shown below:

 Yr   %*0.6   Yr     %
1922    3    1993    0
1923    5    1994   16
1924   17    1995   22
1925   10    1996   25
1926   15    1997   18
1927   20    1998   16
1928   19    1999    2
1929  -11    2000  -20
1930  -20    2001  -18
1931  -28    2002  -23
1932   23    2003   27
1933    8    2004   11
1934    6    2005    5
1935   29    2006   15
1936    1    2007    ?
1937  -14    2008    ?
1938    5    2009    ?
1939   -4    2010    ?
1940   -5    2011    ?
1941   -5    2012    ?
1942   23    2013    ?
1943    5    2014    ?
1944   14    2015    ?
1945    7    2016    ?

Note firstly that if 2007 does in fact finish mildly positive, then for 15 years in a row there will have been a correlation in terms of positive/negative return. I.e. if the index was positive 80 years ago then it has been positive this time around too (and vice versa).

Note secondly that the next 5 years ain't looking too clever! This ties in nicely with macro conditions out there in the real world, IMO. But, although the pattern suggests a grim year in 2008, it does NOT point to armageddon.

So, my prediction based on this correlation: 2008 to be grim (-14% or thereabouts), followed by 4 years of muddle-through, with negative total return over this period. After that things either cheer up considerably ... or else this pattern breaks down and it all goes completely to pot!

Just a bit of fun, remember. Me? I'll be trading the ups and downs (and more downs) 'til sometime in 2012, at which point I'll bung my pot into an HYP and retire to what's left of the civilised world.

Best to all in 2008 and beyond,
Loaf

Loaf,

That is so interesting. I have been surprised at the number of broadening formations of various kinds I am seeing. A very rare pattern but seen quite a lot in the 30's. 2000-2003 corrected 50% of the whole bull trend from 1984. Massive.

I'm not much good with figures but I have attempted working out the figures for the rest of the table assuming the same adjustments, if someone could check them I would be glad:
2007=6314
2008=5429
2009=5700
2010=5472
2011=5198
2012=4938
2013=6073
2014=6376
2015=7268
2016=7776

Now the interesting thing is that my current target for FTSE downside is 5015 at fib 50% of the bull run from 2003 to 2007 (close to the prediction for 2012 at 4938). My current target is not a fib based one but from the pattern at the top. Following on, the 161.8% fib retracement of a fall to 5015 is 7830.

Now if I adjust the 161.8 to 7775, the fall in 2012 is just below 5000 at 4955 approx. This sounds pretty good to me (a rally off a fall below a key round number).

So the whole pattern seems quite close to the kind of assumptions we have been making but the time frame for FTSE to recover the end 2007 level is nearly 7 years and 8 years to reach 7000!

OC

Loaf,

Another interesting fact. The very bottom of the Wall Street Crash came in 1932 (showing a rise on the year in your table) at 41.22 on 8 July. FTSE bottomed in 2003 at 3277.5 on 12/03 also a positive year!

Perhaps, we will have to wait 'til 2013 for the true bottom to be reached with a dead cat rally in 2009.

OC

Another interesting fact. The very bottom of the Wall Street Crash came in 1932 (showing a rise on the year in your table) at 41.22 on 8 July. FTSE bottomed in 2003 at 3277.5 on 12/03 also a positive year!

Perhaps, we will have to wait 'til 2013 for the true bottom to be reached with a dead cat rally in 2009.

Hi OC,

Yes, it's worth saying that even if we do end 2008 down 14% (say) that doesn't preclude us being down 30% at some point earlier in the year. Not that I'm expecting that, particularly.

Just to stress also that these are total return figures (including divi's). That needs to be taken into account when calculating predicted end of year market levels.

But hey, all this is very approximate stuff - I just thought the basic correlation was interesting.

Loaf

In the spirit of fun, I am reminded of what I thought (and still think) was a very good cartoon:

In a cathedral sized room, crammed with desks, each desk seating a monkey with a typewriter, three white-coated men were eagerly reading what one particular primate had produced. It read "to be or not to be tho8490 jihpo8d;topjaljt[oprejfk;nedo.."

Good luck and happy new year.

Doze