2005 Year-End Rally?

Here's how Goldman Sachs compares 2005 with 2004's year-end rally.

Similarities with 2004: (1) Seasonal Pattern: in 2004 SPX was FLAT through October 22nd and then rallied 11% to finish the year up 11%. In 2005, market was flat through October 27th and has now rallied almost 8%. (2) Sector Leadership: The 2004 rally was led by Materials (+13%) and Consumer Discretionary (+13%), the same leaders as in 2005. Financials, Health Care, Industrials were up 12% with Technology up 11%.

Differences: Breadth. The 2004 year-end rally was consistent across the market with ALL TEN sectors rallying. 8 of the 10 sectors rallied between 10% and 13%. Weakest rally was in Telecom (+7%) and Consumer Staples (+8%). HOWEVER, we have had more dispersion in the 2005 rally with Utilities (-4%) and Consumer Staples (-4%) down last month. Looking Ahead: We recommend investors overweight Energy, Technology, Industrials and Health Care, avoid Financials and the Consumer.