Election Year Pattern With a Twist

I have been following the election year pattern and it remains on track, with a 2 - 3 day lag (see chart, courtesy PragCap).  There is an interesting twist this election, but first a discussion of the general situation. The prognosis, per PragCap:

Looking ahead, this version of the Presidential Cycle Pattern says that we should expect to see a choppy uptrend continuing toward election day, perhaps with some significant “texture” along the way.  The strong correlation up until now suggests that this pattern is working reliably.  Once we see how the election turns out, we can then figure out which pattern to follow starting in November.

What is interesting is that this version of the chart has taken out the 2d terms and only focused on first term Presidents, a more true comparison to this election. The generic chart that we showed in the prior post combines first and second terms and the behavior is different in each term. Per PragCap: 

As a rule, [new Presidents] all typically spend the first year in office “discovering” that conditions are even worse than we were told during the campaign, and that the “only solution” is some urgent package of tax changes, spending, regulations, etc. ...

When a first term president wins reelection to a second term, then he typically does not spend much time in the first year telling us all about what a lousy job his predecessor did.  That lack of a persistent negative message seems to work out to bring slightly better market performance right after a reelection.

But with a new president from a different party, investors tend to get discouraged hearing that things are worse than expected, and so the market’s performance during the first few months with a new party president is on average slightly worse than if an incumbent wins reelection.  Over time, though, it tends to average out to be just about the same.

This chart shows the comparison of first term vs second term Presidents:

What is different this time is the pattern has not worked well in the last three elections, perhaps because we hit a secular bull market peak in 1999 and have been in a secular bear through the past three elections. The pattern broke in 2000 and 2008 when we had market crashes; it also didn't hold in 2004. 

This time there is a lot of can-kicking going on to push the problems to after the US election.  A lot of commentary over the past week out of Eruope thinks the latest ECB moves can buy 3 months, and of course the fiscal cliff doesnt rear until after the lection. The one stinker is that we may hit the debt ceiling limit faster than expected, before the election. 

Comments

[Hockthefarm]

Y:

The market is finally overbought, so I think we will see some kind of pullback before the end of October. But I think it gets bought with both hands and that Obama ends up in the winner's circle as a consequence.

Prechter and Dent seem to have lost a step. Undoubtedly, global QE (on steroids as dent would say) will get the blame. Statistically, Hussman has us headed into an event horizon although he does state that we could top for a few months before heading down:

http://hussmanfunds.com/wmc/wmc120910.htm

I've decided to follow Sy Harding's seasonal strategy for the next cycle. It will be interesting to see when his buy signal comes in this October and even more interesting to see when he pulls the plug next year. His macd cycle work is statistically relevant and in this crazy world that is good enough for me.

I don't see any sustained earnings growth in 2013. It is not that I think P, D and H are wrong, I just think they are a bit early.

Manning is back. Don't fluck with the horse!

Hock

[Virgil]

The Russel 2000 closed outside its Bollinger Bands on Thursday & Friday. It then closed back inside yesterday & below Friday's candle. Pretty reliable signal. Even better would be a close below Thursday's candle.

The bears are starting to circle. Did you catch this one on Prag Cap today

A reversion to the mean for historical growth

[yelnick]

Virgil, provocative paper. But maybe it is cyclical - the long debt cycle (1973-2007) drove the wrong sort of growth.  Read Steve Keen's Debtwatch for boatloads on this. 

[Virgil]

Thanks Yelnick I will check him out.
I think it probably is cyclical. If you wanted to put a wave count on it, you could call the current drop wave 4. I'll go along with little to no growth from 1300 to 1700, but there's no way there wasn't any national growth from 1000 AD to 1300 AD when Europe ascended from the Dark Ages.

[Hockthefarm]

Virgil:

I think western governments (the US in particular) wanted people of all circumstance to have access to unlimited credit, and further they wanted the same for themselves.

Then they built an economy around those very principls.

How do you inject a trillion dollars into a slow economy? Give it to 18 year olds and create shortages.

1 in 5 people in Spain were involved in the construction industry (here it was 1 in 22). Today 25% of Spain is unemployed and it is over 50% for young people. I'm sure someone named Adolph is walking the streets of Madrid waiting for his turn. And I can see why people would vote for him.

So I see it as more of an end game than anything cyclical. Exponential functions end in the real world.

Saw your note on the rut. Sy Harding is as bearish as I've ever seen him. Should make for an interesting October. Big day tomorrow.

All the best,
Hock

[Virgil]

You're a good man Hock.
And looks like you guys were right getting rid of Cutler. A little bit of pressure and the guy turns on his team with a vengeance.

By most meaningful statistical measure the market isn't just overextended right now, it's floating in space. Picking a top is just a guessing game though without a nice reversal under one of these long daily candles.

All I know about Harding is what you mention about him, but Prechter is turning bullish. They were hinting at it for a while, so it shouldn't come as a surprise.
He also kind of re-wrote his book by changing his wave count for the 70's.

[Hockthefarm]

Virgil:

Global markets in the early stages of the biggest disaster ever.......on the cusp of a second downturn, which will be of epic proportion.

That is how P started his Sept ewt on the 12th. Hardly bullish. That said, he did call for a serious market downturn starting in March, so we are six months late. So I could see where he might want to get a little bullish. I like him for his insights and don't really follow his market turns.

Hussman is in complete agreement with you. What I like about Hussman is that he actually admits there is a random, unmeasurable component to the market. It is that part of the market that makes ew rear view much of the time.

Thought you would enjoy:

http://hussmanfunds.com/wmc/wmc120917.htm

Hock

[Virgil]

Hock,

Interesting report. Thanks for sharing. I've been getting into signal extraction lately, so I'll have to look into Hussman.

I think one of the reasons people hate Prechter is because of things like his last letter. He did change his wave count but he didn't even acknowledge it or change his fundamental outlook. He also introduced an alternate count that could take the market a lot higher.

"If the wave labeling in the Alt. line of Figure 2 is right (a slim likelihood in my opinion), wave 5 could struggle up to a double top, closely matching the 2007 high, and still keep the Fibonacci relationship shown in Figure 1 intact".

Or it could just as easily blow away that Fib time ratio and take the Dow to 20,000. He wrote in his book that price trumps time every time and time is the hardest thing to measure. Yet now he insists his time cycles lead over his price analysis.

The real kicker for me is this chart

The biggest knock on the super bull counts like Caldaro is the price does not count well as an impulse up because of all the overlapping movement. But if you look at the 1800s you see it was difficult to find clean impulses in (III) also. That was the third of third of the Grand Supercycle wave. It unfolded as a series of nested 1-2's during a time of worldwide price deflation dubbed the Long Depression by historians. (Plus (II) was the rare running flat).

http://en.wikipedia.org/wiki/Long_Depression

Now I like Prechter and will continue to subscribe because like you I appreciate his his work. However, you have to filter his analysis when you read him (obviously or you'll blow up your account).

[Hockthefarm]

Virgil:

Interesting stuff, thanks.

I've been following Peter Eliades' cycle work for about a year now. He is iffy on a correction in October, but sees quite a move up in the coming favorable season. Expects the NY Composite A/D line to peak in November. If it happens, he expects the market to continue up for another 3 to 5 months.
Then it is lights out all over.

He is semi retired and only publishes when he has something to say (7 or 8 times a year). Charges 20 bucks a pop and emails you when a letter comes out. No subscriptions.

Hock

[Virgil]

Hock,

I think you were right before except that we make one more lunge at 1500 and then a healthy election sell-off which implies to me Obama will stay in the lead. After that we get a post-election end of year rally.

[Hockthefarm]

V:

I think you are probably right on all counts. Next week should be down but maybe not as much as some people think.

Not much talk of the Big Kahuna down from Prechter any more. Funny how that goes as you were pointing out.

I guess Romney was trying to rally the 53 percent. I think he has lost the hard working folks that have lost their jobs and/or career paths. It is hard to watch the government corner and control the housing market to drive up prices when so many people are poor. That they do it with impunity is a bit frightening. Go Bunker Hunt! Seems to me it didn't end all that well for old Bunky. We shall see.

Hock

[Virgil]

Here's a couple views of the SPX I'm looking at today

Interesting looking channel that price has obeyed

http://oi49.tinypic.com/2v3seo9.jpg

time and price are showing some nice equalities

http://oi49.tinypic.com/4loh7d.jpg

The second rally from Mar 09 to now is darn close to (sq rt 2 - 1) * the first rally from Oct 02 to Oct 07.
When measured from the bifurcation point in Mar 03, the ratio is 76.4

[yelnick]

Virgil, interesting charts.  Fractal Finance would say that if we had a throw-under of your channel, we should expect a throw-over before the end. 

[Virgil]

Yelnick, we might get it the way the Fed is juicing the markets to keep Obama in the White House. Although, the traditional currency proxy for equities, AUD/JPY, looks more bearish and has been making lower highs since last year.

Correction on that last equation, it should be the sq rt 2 / 2

[yelnick]

Virgil, I have been sitting on a post regarding the AUD/S&P correlation.  When it breaks the divergence signals the endgame, whee I would expect Treasuries to rise (yields fall) as a flight to safety commences. I thought of tying it to the EWI bond report (that Treasuries had peaked and yields had bottomed for this cycle, which I think premature) but got too busy to bother.  

[Virgil]

Yelnick, haha it's a wonder why anyone bothers anymore when faced with these Fed pumped zombie rallies.

Speaking of EWI, the one thing they did lately that got my attention was not that bond report, but a special Asia report calling for Chinese stocks to rally

http://oi50.tinypic.com/2cqha2e.jpg

Not only does this imply that the Aussie dollar rises (which I agree it should, to new highs, after first going back down to parity in the wake of the US election), but it seemed really odd considering the Prechter P3 doctrine. However it does agree with their bond forecast considering this correlation:

http://static6.businessinsider.com/image/4ef31d8e69bedd5745000059-568-426/chart.jpg