January 29th, 2010

Mid-term Elections in 2010 and the Stock Market

I have to admit, it’s kind of eerie. I wrote “The Importance of S&P 1150 Can’t be Overstated” on January 19 and, since then, the market has dropped 5.71% in just seven trading days. Furthermore, if the market declines tomorrow, another domino in the line (the 100-day moving average) will fall.

Some relief may be on the way, however. With some trepidation, I remind those who believe in the lunar cycle theory as it relates to the stock market that this “bearish” phase ends this weekend (on January 31) and a more favorable phase and lasting until Monday, February 15, starts on Monday (as outlined on January 12). That doesn’t necessarily mean that the recent decline will be erased and the bull market will continue. In all likelihood it might only mean that the decline might pause giving you an opportunity, if you missed out on it, to “sell into the rally”.

The big question on everybody’s mind is “If this is a correction, how deep will it be and how long might it last?” Something that came across my screen (in days gone by, didn’t we use to say “came across my desk”?) that I found relevant and important to share with you. It’s something called the Election Cycle Power Zone from a firm called Alpha Investment Management. The focus of Alpha’s research seems to be the Presidential cycle and they’ve come up with some interesting statistics:

“The Power Zone is 15-months long, beginning 30 days before the mid-term elections. This 5-quarter period has not been down since 1931 (Dow Industrials’ Total Return)…..The average return has been 25.5% plus dividends. The average daily return since 1931 has been 7.7 times greater than the average daily gain for all other trading days. A $1,000 investment in the Dow only during the Power Zone (31% of the time) appreciated to $68,200 as of the end of 2009. A $1,000 investment in the Dow during all other trading days (69% of the time) grew to just $1,800 since 1931…..If there is any time to be invested in the stock market, it is this.”

I usually focus on what the charts say without paying too much attention to statistical stuff like this (nor the lunar cycle, he says in jest) but there may be something to the impact of politics on the market this year. I contend that there hasn’t been a mid-term election in quite some time with as significant a financial impact as the one this coming November.

As the campaign truly heats up after Labor Day, the issues and sides will become clearer. It will become even more evident that one party rule (Democratic) may end with the market breathing a sigh of relief. For the bull market to resume, there won’t be a better time than when it becomes clear that

  • Congress can make a new stab at economic stimulus, one that’s more favorable to business (i.e., shifting the focus from leading through punitive taxes to investment and business tax reductions and incentives),
  • Congress can begin a real attempt at reducing the deficit through true spending cuts rather than tax increases and
  • Obama will moderate his vision of change, out of necessity, to be more evolutionary than revolutionary.

Where will the market be by then? How much further will the correction go? I wrote about precedents quite a while ago (September 3o) when the market wasn’t far from where it closed today in “Two Market Consolidation Models: 2004 and 1933-35“. [By the way, 2004 was the final year of G.W. Bush’s first term and 1933-35 spanned FDR’s the first two years in office.] Unfortunately, we won’t know until we get closer and are in it.

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  • Jayhawk91

    Interesting stuff about Mid-terms, lunar cycles…I enjoy reading your blog.

  • Jesse

    they're continuing to sell the news even on 5.7% reported gdp. It's interesting what you're saying about this cycle possibly ending today until Feb 15th. But, if we want to go into speculative type things such as the lunar cycles, I'll throw this at you! lol
    As January goes, so goes the year!

  • Jesse

    I work for a small business. My boss was explaining the presidents new "brilliant" plan to create jobs by giving employers a $5,000 tax credit for hiring. He said "if I hire someone, we'll end up having to close the doors. I can't afford to hire. $5,000 doesnt pay a salary"
    You're comparison to JFK was brilliant. How long until this arrogant stubborn man learns and takes action needed to turn this economy around? Even the mid term elections are not going to change things. It will create a stalemate. Obama has made it clear that he will take on anyone and everyone that stands in his way,businesses, banks, the American people who overwhelming are not in favor of socialized heath care, even the supreme court justices.
    Humble yourself Mr. Obama before our entire nation suffers for it!

  • Jesse

    The Mass. election should have sent the message loud and clear, but instead he has actually stepped up his defiance and arrogance.

  • Anonymous

    My EW analysis strongly suggests the bear market is not over and we will see an ultimate low below the March 2009 lows. Canada, US and Japan all look similar.

    Canadian Money

  • Joe

    I don't believe in EW and look forward to later this year, after the correction has been completed …. without turning into a continuation of the crash …. and the final nail can be hit into the coffin of EW.

  • Jesse

    I would agree with the anonymous statement. I believe EW is right and we see a lower low that March 09 also. But I would say that it may not happen until 2012 even. Buckle up your chinstrap, it's gonna be bumpy!

  • Anonymous

    Now that some time has passed, it would be interesting to see a follow-up.

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