Where we are now in late 2010 is similar to where markets were in late 2004. There had been a strong rally in 2003 post the trough in the market after the TMT bubble. Then in the spring of 2004 the market stalled and there were several months of relatively tight range-bound trading. Then in late 2004 the market broke out on the upside and never looked back (well not until the summer of 2007 ...but that is another story).

So far these last couple of years have been similar to 2003/04. The market rallied strongly last year but then stalled from around April of this year trading in a range until relatively recently. The volatility and magnitude of the moves within this range-bound market have been much greater this time around than they were in the middle of 2004. But the reason for this flatish performance in the middle of the year has been the same both this year as in 2004; Global lead indicators started to roll over.

So what got us out of the malaise in 2004 and what therefore might do so this time? Interestingly the link between performance and the economy was not as strong as one might think. Although it is clear that the lead indicators rolling over in early 2004 were associated with the correction at the time (shaded area in Exhibit 1) it is not clear that the rally in late 2004 and into 2005 was coincident with a decisive recovery in lead indicators. Indeed the headline GLI (our proprietary global lead indicator for the industrial cycle) was falling even as the market rallied in late 2004 and early 2005.

Eoin Treacy's view I am somewhat sceptical of relying too heavily on past cycles for the simple reason that while current events might rhyme with the past, history is unlikely to be repeated. There is the added complication that as investors become more aware of a similar event having happened in the past, the more likely they are to pre-empt it and so change the possibility of it being repeated. However, looking at this chart of the Dow Jones Europe Stoxx 600 there are some tentative conclusions we can draw.

In the last decade the Index has pulled back violently from the 400 area on two occasions and was deeply oversold by any measure when if found support above 150 in 2003 and 2008. On both occasions, powerful short covering rallies helped to unwind the overextension relative to the 200-day MA. Following such impressive advances it is perhaps not too surprising that a period of underperformance followed as the full extent of the market action was digested. The current range in the region of 250 has been considerably more volatile than that posted in 2004 which can be at least partially explained by the European focus of the sovereign debt crisis.

While the Index has firmed somewhat over the last few months, a sustained move above 270 would be needed to reassert the medium-term uptrend and indicate a return to demand dominance and raise the chances of the highs being retested at some point.