Lessons from 2005

SPX: gray line
Geometric Average of 2005 Top SPX Stocks: black line

The above chart shows the "average" performance of 2005's 20 best SPX stocks (as defined as the geometric average of the stocks) v. the SPX. Though the average stock is highly stylized, several useful lessons can be infered: 1) a strong stock should not fall substantially below its December low; 2) a strong stock should rise above its December high in January; 3) around April 15 (tax time), stong stocks may consolidate as some shareholders lock-in gains to pay tax liabilities.

It is also interesting that in 2004 the average performance of the 2005 20 best equaled 53%. So the momentum for these 2004 winners continued to 2005, partially explained by the continued strength of the energy sector in 2005. Now the question becomes: will 2006's best stocks follow a similar pattern? Which strong stocks from 2005 will continue to perform in 2006? Stay tuned.