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Year-End Review by Victor Niederhoffer

I came across a heinous self-congratulatory piece wherein the weekly financial columnist who has been bearish continuously for 40 years congratulated himself for being bearish starting at the end of the century, noting the terrible market events, terrorist events, and war events that happened during the new century, patting himself on the back for sticking to his guns, and noting that December 2005 seemed inordinately terrible in that it declined when people expected it to rise.

I found the tone of the piece grotesque, even more so than the usual supercilious mocking and parodying of those fools who are optimistic and don't see the risks, that characterizes 100% of what he writes in his columns. It reminded me of what cult leaders do when they find that their ideas have not been accepted or have been challenged by the facts, although I didn't see any evidence of the frequent calls to action and increase in propaganda that usually accompanies such a violation and challenge to the leader's and followers' self-esteem (as described in Festinger's work memorialized in PracSpec).

And yet, it led to my posting as of year-end the counting piece "Hold the Bubbly," in which I concluded, "In short, the dismal performance in December, which is sure to be crowed over by the bears, is quite bullish from a seasonal standpoint." OK, the market registered four consecutive up days since then and is now at 1285 as of the first Friday close after the year-end, 3% higher than the 1248 close at year-end.

It seemed reasonable to go back to the 13 years during the last 50 that showed December declines and note which of those years showed a rise in the first week of trading of the new year, and look to see whether there was a tendency to reverse or continue in the rest of the month. Of the 13 declining months, three of the next weeks registered a decline: those following declines in 1955, 1968, and 1981. That left us with 10 years in which a December decline was followed by a rise in the first week. An enumeration:

Performance Following a Good First Week of the Year
Preceded by a Decline in December:
Year  Move  Move  Move
      That  Next  Rest of 
      Week  Week  Month
1957    2%    -1%     2%
1966    2      3      3
1969    1     -1     -8
1974    3      4      6
1975    1      4      6
1980    1     -2     -3
1983    3     -2     -3
1986    3      5      5
1996    1      1      3
2002    3      2     -8
Avg     2      1      0
2005    3      ?      ?

I conclude that the week following good first-week rises after bad Decembers is bullish with an average of a further 1% gain, say a 25% chance likelihood by chance.

Also, there is a tendency for the four very good first weeks of 3% or more to be followed by a subsequent good week averaging +2%, which one would have to test by simulation for its chance likelihood, but because I've performed more than 50,000 similar hand calculations I can say is about a 10% chance shot.

I predict that the weekly columnist will have a particularly vitriolic and hateful piece about the mistakes investors are making by buying in 2006, and that his most sagacious friends are even more than usually bearish.

Dave Baccile adds:

I note that the AAII U.S. Investor Bullish Sentiment Index declined to 29.3 last week, matching the low last August and the previous low in May. I observe that the Sentiment Index typically follows the recent performance of the market. If the market had a good week, sentiment improves. But that trend has broken down. Despite the market indices' reaching new 52-week highs, even the bulls are disbelievers right now.


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