Election Year Rally Following Historic Pattern

This chart from Bespoke made the rounds a few weeks ago, and it is interesting to note that it continues to work as a predictor of this year's election rally. We have continued higher, and now may be in the final blow-off stage into early September.

It is mildly interesting to note that late August/early Sept tops happen in big turns years (1929, 1987 etc.); and also happen in relatively normal years. It is just that in an election year, the summer rally seems to last longer. The correction in Sept usually denotes uncertainty over the election. When it becomes clear who will win, the market rallies again. In 2008, the post-correction rally waited until the end; of course a lot was going on in Sept 2008.

The normal seasonal pattern is a rally commences in mid Oct to early November, and continues into late April or early May, with a mild correctiion in late Jan/early Feb. The market then has a June Swoon and Summer Rally, but essentially meanders sideways into Oct, until the seasonal rally takes off again.

The Election Year pattern shifts the swoon to later, usually after the Conventions, and starts the seasonal rally earlier, unless the election is a cliff-hanger (1980, 2000, 2008).  

Of course, this is an average of many different years and circumstances, so don't take it to the bank. Just note that almost every election is said to be critical, that the country is in crisis, that This Time It's Different, and then it isn't. 

Comments

[Hock The Farm]

Hello Y:

Absolutely fantastic that you are sharing your insights once again.

I expect a top next week (market should get overbought by then), but not much of a correction after. Sideways to down maybe 3 to 5 % on the SPX. Was thinking of a little TZA but not sure it is worth it.

Sy Harding is 20% shrt the RUT and has been for a few weeks. He expects a good run into the new year after an October bottom.
I've been told to load up at the October bottom for a good run into May (10 to 15 % depending on the correction).
The Bespoke chart you posted blew me away. Pretty much the same view.
I still read Prechter and the STU. Do you think his cycle work has been screwed up by the Gubmint? I do.
All the very best,
Hockthefarm

[Hock The Farm]

Y:

Meant to add that I don't think wall street really cares who wins this time out-Meet the new boss and all that, so we may bottom fairly early in Oct.
Retired folks, well that is a different story. The Bernanke has screwed them with impunity and I think they are running a bit scared.

Hock

[yelnick]

Hock, good to hear from you. I think Prechter is too enabled with his P3 down to see the unfolding pattern since 2000 is more a giant range, either a triangle or a complex correction. I am still expecting a triple top around sp1550 before thenext big drop comes.  

[Virgil]

Near term target 1450ish labor Day top.
A few observers now have noticed that price action since the June low looks like a scaled down version of Oct - Dec 2011.

[Virgil]

http://www.advisorperspectives.com/dshort/guest/John-Carlucci-111128-Best-Indicator-Ever-Part1.php

If this is the best or even a decent indicator, it's giving a pretty solid buy signal right now.

I think not only is Hock right about Prechter's cycles and predictions, but Prechter himself has even been hinting that the Fed's reflation is skewing prices. He likes to slyly slip in concessions and introduce stealth alternate counts without really coming right out and saying it (see figure 5.7 in 'At the Crest of the Tidal Wave').

One thing he's got nailed, however, is bitcoin. It's going to explode after the next pullback.

I wonder what the catalyst will be. Aren't they starting gambling games on Facebook? Maybe to get a legit onshore foothold, virtual currency is used? Maybe Google starts their own digital currency to de-fibrillate Google+?? Seems they have the juice and the integration to make something like that happen.

[yelnick]

Virgil, Bitcoin shows a misunderstanding of what money is.  It is having problems of trust since their algorithm to avoid excess creation has been hacked. But that is besides the point.  Gold worked under the classic standard because of the Real Bills Doctrine, which allowed the velocity or gold to vary as needed, removing the potential straight-jacket of inadequate supply during boom times.