Peter Eliades YEARS ENDING IN FIVE PHENOM

Years ending in '5' always thrive? Headed for a down cycle
Commentary: Years ending in '5' always thrive? By Peter Eliades, Stockmarket CyclesLast

Update: 12:17 PM ET Dec. 22, 2004 SANTA ROSA, Calif. (SMC) -- We believe investors are about to be bombarded with good news about the prospects for the stock market in 2005. Indeed, a review of stock market performance since the inception of the Dow Jones Industrial Average (INDU: news, chart, profile) in 1897 reveals some startling and very optimistic statistics relating to the fifth year within every decade. There has never been a down year in a year ending in "5." That, however, is only part of the story.

Here are the results for the Dow Jones Industrial Average from the close on the last trading day of the year ending in "4" within each decade to the high close of the following year: Year 12-Months 1995 36.0% 1985 28.2 1975 43.0 1965 10.9 1955 44.0 1945 29.0 1935 42.7 1925 32.3 1915 80.5 1905 38.7 Average gain 38.5% In other words, if we assume the Dow Jones Industrial Average closes the year 2004 around its current level of 10,690, an average "5" year would produce a close of 14,804 sometime during 2005. There is another fascinating statistic relating to the year ending in "5" within each decade. Virtually every one of these "5" years has registered its low for the year or within just a few percent of its low for the year in the month of January.

Here are the statistics: Year Date 1995 January 30 1985 January 4 1975 January 2 1965 January 4 Five days in June closed slightly lower. 1955 January 18 1945 January 24 1935 January 15 Nine days in March closed lower, then straight up. 1925 March 30 This was the only exception. 1915 January 2 February 24th closed less than 1 percent lower 1905 January 25 On average, the low for the year within the "5" year occurred around Jan. 22, from which point the market never looked back. These are spectacular statistics which seem to be preparing us for a stock market year that will make everyone (but the Bears) happy.

But let's take a moment to play devil's advocate. We started by saying that we felt investors would soon be bombarded with the type of news and statistics we've just presented to you. There's no denying that history has smiled upon the "5" year of each decade for the past century or longer, but therein lies part of the problem for the year 2005. What everyone knows in the stock market is usually not worth knowing. Stockmarket Cycles began publicizing the mystique of the "5" year 20 years ago when very few people were aware of the phenomenon. In 1994, awareness was increased. As we approach 2005, we believe the publicity concerning the phenomenon will increase dramatically.

At the end of 1974, 1984, and 1994, adviser sentiment had been bearish for a significant percentage of the calendar year. Unfortunately, we are facing an almost exactly opposite sentiment picture that stands ready to be fuelled to even greater heights of bullishness by siren promises of another great "5" year. By the end of 1974, there had been 42 weeks in that calendar year when the Investors Intelligence (investorsintelligence.com) survey of investment advisers showed a plurality of bears over bulls. At the end of 1984, there had been 20 weeks showing a plurality of bears over bulls. At the end of 1994, the sentiment statistics had been so amazingly one-sided that there had been 47 weeks with a bearish plurality. It was a perfect set up for a spectacular 1995. Absence of bears.
Now we approach the end of the year 2004. What is the current sentiment picture? There was not a single week within the year that showed a plurality of bears over bulls. In fact, the plurality of bulls over bears remained so steadfast throughout the year that the smallest plurality was 9 percent. What makes that all the more remarkable is that it was preceded by the same statistics throughout the year 2003 -- not a single week with a plurality of bears. There has been a mindset of steadfast bullishness for well over two years. The average plurality of weekly bulls over bears since March 2003 has been a staggering 31.4 percent. To put these data in perspective, there have been only seven full calendar years in the history of Investors Intelligence data (since March 1964) where bullishness has been so great they have escaped without seeing even one week with a plurality of bears over bulls -- and only one other consecutive two-year pairing such as we are seeing in 2003-2004. The other consecutive year pairing occurred in 1999-2000. The other years were 1972, 1976, and 1983.

Here comes the killer statistic! So far, each and every year that has failed to see even one weekly reading with a plurality of bears has been followed by a negative year. As we write this, the jury is still out for the year 2004. The Dow closed out 2003 with a reading of 10,453.92. What is perhaps even more troubling is that the only other instance of consecutive years without a plurality of bears over bulls, 1999-2000, was followed by a decline of 41.8 percent by the Standard & Poor's 500 Index (SPX: news, chart, profile) and 33.2 percent on the Dow Jones Industrial Average.
Based on these data and other sentiment data, and on the market's current valuation, we believe the odds favor a breaking of the win streak for the "5" year and we fear the market faces great vulnerability over at least the next 12 to18 months.
Here are a few clues to watch for in the coming year. We noted earlier that the "5" year within each decade has almost always registered its low for the year in January. Amazingly enough, the high for the year following years without one weekly plurality of bears over bulls has been registered within the first 10 trading days of January in four of the previous six cases, and before February 12 in five of the six cases. We should have a strong indication of a bull or a bear year for 2005 by the end of February. If February registers a high above January, the odds favor an up year overall. Conversely, if February makes a lower high than January, the odds would favor a down year overall -- perhaps a big down year. We will watch February with great interest.

Peter Eliades edits the Stockmarket Cycles market timing newsletter, which is cyclically and technically oriented and based on Eliades' theory that price movement in the stock market is related to repeating cycles rhythms. (stockmarketcycles.com)Content found in The Guru's Corner is subject to the terms and conditions found in the Disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions. (disclaimer)