Here’s One Way To Predict Where The Market Will Go In 2004

Block Your Ears!

First at
I’d like to wish you a Happy and Healthy New Year. 2003 was certainly a good
year, especially for the markets. The Nasdaq led the way and the blue chips
followed, with the Dow rising over 25%.

This week’s piece will be much shorter than normal, as I’m
taking a few days off to play “ball retriever” for my kids as they prepare for
their upcoming tryouts for the baseball and fastpitch softball season. But, with
so many “professionals” making their clairvoyant predictions for “exactly” where
the Dow will end 2004, I’m throwing my hat into the ring. I can’t help myself, I
just have to show you how smart I am and tell you where the market is going.

My Guess…I Mean “Prediction”

And my prediction is for the Dow to finish 2004 at… I have
no clue! And neither does anyone else. THEY’RE ALL GUESSING. They’re in
Business Week guessing, they’re in Forbes guessing, they’re in
Fortune guessing, they’re in Barron’s guessing, they’re sending out
brokerage house reports guessing, and they’re on TV guessing. Up 25%, down 11%,
12,473, 10,346, 7,487, guesses, guesses and more guesses. Look at last year’s
predictions (and every year before that). All guesses. Most not even close.

And the one or two guys who are close are referred to as
“prophetic” (I’m not kidding you, that’s what one of the magazines recently
referred to one of these guys because he was within 100 points of where the Dow
ended. He was the closest of the 50 Wall Street professionals they queried at
the end of 2002).

Well, we here at TradingMarkets have our own prophetic
market timers. Next week, I’ll introduce you to three of these “prophetic”
people. On Dec. 31, 2002, each picked a portfolio of 5 stocks for 2003.
Incredibly, each one of their stock portfolios rose over 100% for 2003. I’m not
kidding…triple digits for each! Each finished in the top one-tenth of the top
1% of all money managers in the world. Pretty impressive, wouldn’t you agree?
And what makes this even more impressive is the fact that none was older than 5
years old when the contest started! As you will see next week, 4- and
5-year-olds can tell us where the market is going just as well as (and even
better) than the guys on TV.

So am I saying that long-term market predictions are
useless? I’ll let you make that judgment. All I know is that I’m mentally
challenged just trying to predict prices over the next 1-3 days. I’ll leave the
long-term predictions to the guys who are much smarter than me (including the 4-
and 5-year-olds who produced triple-digit results in 2003).

^next^

Looking at History To Guide Us For 2004

I will leave you with some thoughts as to what history has
brought after a year like last. We asked ourselves, what has the market done the
year following it dropped three years in a row and then rose for the year (as it
just did). Over the past 100 years, this has only happened three times and now
it’s the fourth time. The first was in 1905 and the Dow rose 37.84% that year
(dividends excluded). 1934 saw it rise 4.14% and 1943 saw it rise 14.07%. Not
much of a sample size here but a little bit of insight.

We then said let’s look at the market when it dropped two
years in a row and then rose the following year (that would be for 2001-2003).
That’s happened 8 times over the past century. And the market rose 7 out of
those 8 times with 1916 being the only losing year (for those of you who like to
do your own research, the years were 1905, 1909, 1916, 1919, 1934, 1943, 1976,
and 1980).

So What Does This Tell Us?

That at least historically, a few consecutive down years
in a row for the Dow, followed by an up year, is usually followed by another up
year. Six of those gains were in double digits, likely reflecting a continuation
of a market that was previously very oversold. Will we see this again? I have no
clue. I’d be guessing. And, because the guessing game is so crowded today, I
think I’ll just block my ears, head out to the ball fields with my kids, and begin early
preparation for the 2004 baseball and fastpitch softball season with them.

Have a great week trading (and as I mentioned last week,

help you “not guess” in the
University Section of
this site).

Larry Connors

lconnors@tradingmarkets.com