Sunday, February 18, 2007

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!!!!

9 comments:

brd said...

I heard a talk yesterday about the state of the market, and the speaker mentioned 2007 being the 3rd year of the election cycle and how that is historically a strong year. However, he also pointed out that the 2nd year was "supposed" to be a down year, but last year was not. So what does that mean? No one knows, but I hope you are right.

Alex said...

Hi Kenvin ! Been reading you last 6 month ! Thanks for the high quality post you provide ! It s great. I m very impress with cycle ans seasonal now. can you guide me to where is the best resource to learn from and is there a place on the net we can find all the seasonal info !

All the best to you !

Alex

alexgrandmaison at gmail.com

www.grandmaison.net
Qc Canada

betecher said...

Kevin,

watching seasonal charts the japanese yen seems to have a good seasonal pattern from february to april, commercials are net long and weekly price close over the last four weeks high.

Do you think is time to buy on a pullback?

Kevin said...

Hi Alex...

You've really been reading this blog for the past 6 months? That's great but I've only be online 3 months! :-)

Most of my cyclical work I do on my own from studying price action.
If you want to learn about sesaonality, check out www.mrci.com

There are other places you can learn from as well. just do a search on google.

Kevin said...

The Yen is the weakest currency. It may rally it may not...I'd rather buy the Euro.

miamirenter said...

kevin...
re your cyclical analysis, i would resepctfully disagree..
i think while one can still see "deeper patterns" in tech analysis like trend/resistance/support/fibs etcetc..cyclicals to me is as whimsical as they come..
i would be very surrise if spy is up this year (despite most analysts being bullish about)
well, there is some money in being contrary..

Kevin said...

Actually most people are skeptical about this rally so if you are a contrarian you would have to be bullish. :-)

h. lovil said...

Well I can understand yuou moving from bearish to bullish...one cannot fight the tape for ever.

It may be true that there are a lot people expecting a correction but the fact that market shrugs off all bad news and looks at it as good news...eg the huge drop in hosuing starts or the first drop in housing prices in the last 50 years...makes me think that this is near the irrational end of a bull...not the hesitant middle.

In any case I will stay mosttly in cash and wait and see what happens...good luck

Bullish Jim said...

You're right- there aren't any dips to speak of lately! In fact I've now modified my definition of dip down to a bad hour or so. No sense in sitting on cash! :)

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