Holding Your Breath for a Year-End Rally Might Make You Blue

Seasonal factors usually spur big stock gains at the end of the year, but there are some differences this time around that could change that. Write up your thoughts for our message board.
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There will be a year-end rally.

Nail that sentence to the side of the market. It's as close as Wall Street gets to an article of faith. And not without reason.

"There's a very long history of low points in the fall leading to substantial rallies well into the next year," notes John Bollinger, the well-known technical analyst who heads up


. "If you look at seasonals, the optimum period to own stocks is from the end of October through May the next year. There's nothing written in stone on these seasonal trends, but the record for them is very long, and statistically they're quite reliable."

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You can construct a pretty good fundamental case for stocks adhering to the trend again this year. Most economists reckon the

Federal Reserve

is either done with hiking rates this year or will be done after boosting them at the Nov. 16 meeting. Only a few are forecasting both another hike this fall and a follow-up hike in the first quarter.

The old saw is that you sell the first hike (sell when you see the first hike coming, really) and buy the last one. So maybe it's just a matter of timing. Buy now or buy on Nov. 16. Friday's September

employment report

-- the thing that forecasters are looking to for a clearer picture of the interest-rate outlook -- will be the key. Stocks either begin the year-end surge then, or they consolidate through the month and then get on up. Compound that with an incredibly good profits picture -- analysts expect third-quarter

S&P 500

earnings rose 19.3% year over year, according to

First Call/Thomson Financial

-- and it seems like the market could be ripe for a moonshot.

But a growing number of market watchers, Bollinger among them, doubt the market will follow the usual pattern of rallying through November and December.

No Sign of a Selling Climax

"We have a number of things going on this year that suggest seasonals may not be the best thing to hang your hat on," Bollinger says. The sentiment picture is still too positive. And there's been no sign of the kind of climactic action that usually suggests a meaningful bottom is in place.

"There's no sense of finality to the recent pullback like we've had so many times since 1990," says Robert Dickey, managing director of technical analysis at

Dain Rauscher Wessels

in Minneapolis. "There's been no finality, no conclusive news to really finish it off here. So I think we're in the soup for a while here."

Moreover, on the fundamental side of things, the degree of certainty on where monetary policy is heading is not nearly so high as polls of economists suggest. There's a general belief that the interest-rate hikes we've seen this year will slow the economy down, but they haven't taken hold yet. The economy


slow down, most economists suspect that it


slow down, but there won't be any clear signs on whether it


slowed down until sometime in the first quarter.

"There are issues building up in terms of the inflation picture that don't unwind in a two- or three-month period," says Richard Cripps, chief market strategist at

Legg Mason

in Baltimore. "I don't think we have interest-rate clarity here. I think we stay in a trading range with the market as likely to be below where it is now at the end of the year as it is to be above."

It could be that stocks remain in sloppy condition until well into next year, the way Stanley Nabi, chief investment officer at

DLJ Investment Management

, has it worked out. "I'm making the assumption that there will be an interest-rate increase in November," he says, "and I'm making the assumption that there may be one in February, and I'm making the assumption that in the spring the economy will slow down. And then we're going to have a resurrection of the bull market."

A sideways-moving market like that may not be a particularly safe one.

"Coming into the millennium, I expect neither a bull market nor a bear market," Bollinger says. "What I expect is a great deal of volatility and a great deal of uncertainty. It's a rudderless vessel on shifting seas. Unless the basic variables change, I think this is a time the rational investor will reduce exposure and batten down the hatches."