S&P 500: The Big Picture

If you've been reading my blog for any length of time, you would know that I pay a lot of attention to cycles and seasonality. I'd like to show a few charts of where I think the stock market is headed.

Back in December I was looking for a correction in the market which never came. One of the reasons why I was looking for a pullback was due to the fact that the NASDAQ has sold off every January for the past six years. Since December the NASDAQ has gone sideways while the dow and the S&P continue to advance to new highs. Obviously the markets aren't coming down and I've abandoned my view that the market was going to correct weeks ago. Keep in mind even though I was short Q's I was aggressively buying commodity related stocks such as steel, oil gold,silver and even Nortel.

What I'd like to talk about today is the big picture and how the S&P relates to the four year presidential cycle. Above is the seasonal tendency for the Four year Dow Jones Industrial election cycle. This seasonal chart takes into account over 100 years of data! Right now ( Feb 2007) we are in a Pre-Election year. As you can see in the above chart Pre-Election years tend to be the strongest year of the four year cycle. In fact, returns on the SPX since 1960 have been positive every pre-election year.
Here are the stats for returns on the S&P since 1960:
Election Year........ 10.8% gain
Post Election Year....5.5% gain
Midterm Year.........2.6% loss
Pre-Election year.... 19.90% gain

So clearly the Pre Election Years have been the strongest



Above is a more detailed look at the seasonal trend for Pre-Election Years.



The chart above shows a seasonal trade in the S&P which I've been following for years and it's been very successful. Obviously the big buying opportunity was last summer but according to this seasonal trade, there is still more upside potential and that's the purpose of this post.

I highlighted in yellow all the Pre-Election years for the S&P since 1980.You'll notice that all of these years have been up years including 1987 which was flat to up small. The seasonal trade shown above is to buy the S&P a few months prior to the Pre-Election year which is highlighted in yellow, and to exit in January of the Election year. So you're basically holding this trade for about 15 months.

Like I said earlier, the big buying opportunity was last summer, but according to my cyclical and seasonal work, there is still a lot more upside potential. The S&P should maintain it's upward bias into January of 2008. I'd look to be a buyer of dips but there is one problem, there aren't any!!!!