We are coming off of a strong market year in 2009 after a very weak year in 2008. I looked back through market history for similar years in the past and found the following:
1934: The market rallied strongly in 1933 after the terrible down years from 1930 through 1932. In 1934, the market basically went sideways with fairly low volatility.
1976: The market had a very good year in 1975 after the bear market in late 1973 and 1974. In 1976, the market jumped around 10% in January, but then stayed in a fairly narrow trading range with lower volatility the remainder of the year before another rally in December.
2004: The market had a strong year in 2003 after the dot-com bust years of 2000 through 2002. In 2004, the market opened up strongly in January, but then went into a zig-zag pattern with a downward bias throughout most of the year, before regaining the losses in November/December. Overall, the market again basically went sideways in 2004 with lower volatility.
If history repeats, 2010 will see the overall stock market stay in a fairly narrow trading range with low volatility. But there should still be opportunities to make money in specific sectors, in energy or commodities and in other world equity markets. I think we may see more action in fixed income markets by the end of 2010.
But instead of trying to predict what will occur, the best approach may be to keep mental trailing stop losses on investments and stay invested in asset classes that are trading above their 125 day moving averages. Of course, special situation investing in closed-end funds can work in any market environment, but only when good opportunities occur.