Do you believe this is a secular bear market?
If you do, take note that the Dow has never registered four consecutive annual gains in a secular bear market – EVER.
And yet, it was up in each of 2009, 2010 and 2011 and YTD for 2012, is up 8.4%!
As such, if it finishes the year up, 2012 would mark the first time dating back to 1900 that the Dow has managed four consecutive gains in what ostensibly remains an ongoing secular bear market.
Remarkably, 2011 represented only the second time in history that the index has managed three consecutive annual gains in a secular bear – 1970, 1971 and 1972 represented the only other occasion and the Dow then went on to decline ~50% peak to trough in 1973-1974 with a 17% loss in the first year and a 28% loss in the second year. Moreover, the Dow peaked in the second week in January in 1973.
If we assume this is not a secular bear, making it de-facto a secular bull, a positive 2012 would still represent only the seventh time in history where the Dow has registered a fourth consecutive annual gain.
Returns after four straight annual gains include on the prior six occasions include +48% (1928), -33% (1937), -8% (1946), -4% (1953) +27% (1989), +33% (1995).
In other words, if 2012 is up again, there is a 50/50 shot the index finishes up in 2013 with an average expected gain of 36% based on the three positive examples above and an average expected loss of 15% based on the three negative examples above.
If 2012 fails to make it four consecutive up years, the parallels to the 1973-1974 period suggest things really need to fall apart hard and fast into the end of the year and into 2013!
Regardless, the analysis above is a good example of incorporating macro cycle work into one’s larger thought process on gross and net exposure levels.
In the end, none of us can divine the future. However, what we can do is use the past to incrementally reduce the uncertainty of that future and bit-by-bit, put probabilities in our favor.