It's 2009. For many people this could not come soon enough. While we should take away some lessons from 2008 (Don't miss " How to Evaluate Your Portfolio This Year"), 2009 will bring its own set of twists, turns and challenges. Here are a few things that I will be looking at closely in 2009.
1. Negative Extrapolation: Avoid It!
There is a tendency in bad times to predict that conditions will worsen. On the flipside, when times are good there is a tendency to predict that conditions will get even better.
Last year saw some of the most outrageous calls of negative extrapolation by many analysts, commentators and professional investors (particularly the trend-trading technicians). This has instilled serious fear among investors. However, as bad as things may appear, 2009 may turn out to be a turning point for the economy and the stock market.Quick review: The Dow Jones Industrials Average closed 2008 down 33.8% -- the worst year for the Dow since 1931. According to Dow Jones Indexes, the worst performing year for the Dow was 1931, when the index dropped 52.7%. The second worst year was 1907, when it dropped 37.7%. And now, 2008 is the third worst year ever. Now consider the following. Excluding 2008, the Dow fell by more than 20% nine times: 1903, 1907, 1917, 1920, 1930, 1931, 1932, 1937 and 1974. Here's how the follow-up years performed: 1904 (+41.72%), 1908 (+46.63%), 1918 (+10.51%), 1921 (+12.72%), 1931 (-52.67%), 1932 (-23.07%), 1933 (+66.69%), 1938 (+28.06%) and 1975 (+38.32%). At LakeView Asset Management (my firm), I keep S&P 500 data going back to 1950. Before 2008, the worst year for the S&P 500 was 1974, when the index dropped 29.72%. In fact, other than 2008, the S&P 500 fell by 20% or more only twice since 1950: 1974 and 2002. How did the S&P 500 do after '74 and '02? In 1975 the S&P 500 rose 25.77% and in 2003 the index rose 26.38%. With the exception of 1931 and 1932, the equity markets experience significant increases the year following a 20% or greater decline. So before you believe the negative extrapolation that is being spread, take a look at these historical data points for some quantitative support and ideas.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV