CHART OF THE DAY: The Stock Market Forms ‘Strong Bottoms’ In Years Ending With ‘2’

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The “Decennial Pattern” suggests a cheery outlook for the stock market. Apparently stocks–during years ending in the number ‘2’–tend to carve out decisive market bottoms.

BofA Merrill Lynch analyst Mary Ann Bartels suggests that according to the pattern, investors could be presented with an “important buying opportunity” if stocks dip in the second half of the year:

Using the Decennial pattern as a guide for 2012, years ending in “2” are when strong bottoms are made. Going back to the 1930s, the S&P 500 formed strong year 2 bottoms in 1932, 1942, 1962, 1982, and 2002 or 62.5% of the time. The chart below shows these years plotted with the current period. Using daily closing prices, the base case for years ending in 2 is an 18.0% correction from the prior year’s close leading to a bottom and low for the year in May. 50 per cent of the time, this low occurs in the April to June period. On average the rally off this bottom is 33.5% and lasts until December. While the average rally from the intra-year 2 low to the intra-year 2 high is substantial, average Year 2 returns are generally flat at 1.1%, but the median return is 8.1%. 75% of the time, the year 2 closing level of the S&P 500 is at or near the intra-year rally highs. 25% of the time, the S&P 500 has a meaningful correction off the intra-year high.

Here is a chart showing stock market returns in several past decades before and after market bottoms were established during years ending in the number 2:

chart of the day, decennial pattern years for stocks, august 2012

Bartels notes that the “S&P 500 re-linked to the Decennial 2 year pattern in April and May. From Jan-Mar, 2012 did not follow the year ‘2’ pattern.”

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