October 26, 2010 – How to Trade a “Lost Decade”

Featured Trades: (TRADING A 'LOST DECADE')

3) How to Trade a 'Lost Decade.' Having concluded that you should be selling rallies in the US markets, I would add the proviso that you shouldn't sell just yet. Counter trend rallies can last for years, and this time we have QEII on the side of the bulls, which we are only two months into.

Helicopter Ben is also getting an assist from history. The third year of a presidential term is historically the best for the stock market. For the past 100 years, the stock market has risen by an average 13% during the third year of every administration, nearly double the long term historical average. Since 1961, that gain has been a blistering 18%.

This happens because administrations do whatever they can to boost the economy going into elections with voter friendly, tax cutting policies. So, third year GDP growth is high, averaging 4%, versus the long term average of 2.44%. Isn't democracy a wonderful thing? Therefore, don't keep a hair trigger on selling or shorting strategies. Give the markets a chance to breathe. The Dow could make it all the way up to 14,000 and still be in a long term secular downtrend.

I think the US has entered another lost decade, but expect a lot of volatility along the way. If you are wondering why I am sending you so many long term, deep, 'Think' pieces these days, it's because there is nothing to do here. It is too late to buy, but too early to sell. Keep your powder dry, and live to fight another day.


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