U.S. Markets - 2010 Preview

Everyone has heard of the phrase history repeats itself.  While this certainly is true as it pertains the notion of cyclical nature of events in relation to time, I also see this reflected in the stock market to some extent with the timing element slightly different with each repetition.  2009 was the year of the "stealth bull", as termed by Nadeem Wayalat from marketoracle.co.uk.  The rally off the March 2009 lows and subsequent uptrend reversal in mid-April across broad markets was a rare opportunity for investors to make some serious cash.  Of course, many people were left out of the rally, exhibiting every symptom of a drug addict in denial. Those who fight the market are dead wrong, as the market is always right.  To those who and simply followed the trend and stayed with the same direction as the market, congratulations to you.  Now, what will 2010 bring?

Unfortunately, there is no simple answer to this question.  However, in looking back 5-6 years, we do see some striking similarities in the way the SPX rebounded 00 - 03 recession as shown in the graph below. 

A, B, strong downward movements followed by rebound with lower high. 
C,D,E - inverse head and shoulders followed by strong rally, and uptrend
F - this is where we are in relations to 2003, at the "200 EMA" on the weekly chart.

As previously mentioned, the timing element is always different in the market even though similar (but not the same) patterns exist.  Seeing how 04-05 behaved, this could give us some insight as to how the market may perform overall in 2010.  2004-2005 was a relatively flat year.  Could 2010-2011 be the same?  The crash from 2007 - 2009 was more damaging than 2001-2003, so a greater snapback is expected, but just where it'll end is all guesswork.  Given that investing is a game of probability, I believe 2010 has a higher probability of trading flat than seeing additional gains.  Sector rotation will be key, and it will be far more difficult to profit than 2009.