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Being Street Smart 10/22/4


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#1 TTHQ Staff

TTHQ Staff

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Posted 23 October 2004 - 09:55 AM

BEING STREET SMART ____________________ Sy Harding HOW THE ELECTION MIGHT PREDICT MARKET DIRECTION! October 22, 2004. Even as the Presidential candidates are in a dead heat and trying to break the deadlock with what seems to be increasing desperation (if the misleading statements from both sides are any indication), so too are bulls and bears locked in a dead heat regarding the stock market. The similar situations may be related. As in the political situation, the investment scene is also rampant with factual as well as misleading statements from both sides, trying to convince the other side to switch in an effort to break the deadlock and get the market moving. But for ten months neither bulls nor bears have been able to sustain a move in either direction, creating one of the flattest markets in years. The S&P 500 is within 1% of where it started the year. The always more volatile Nasdaq is down just 4% from where it began the year. As with the political situation, the issues for the stock market seem to be of more import this year than they normally are. Yet, also as with the political situation, neither side seems able to convince the other enough to break the deadlock between the bulls and bears. The bears point to record budget and trade deficits, high energy costs, rising interest rates, high household debt, corporate earnings warnings, unusual international strains, etc., as a pile-up of situations, any one or two of which have pulled the rug from under previous markets. The bulls point to how well the market has held up while factoring in those situations, setting the market up for a big rally as soon as any of those conditions show signs of improving. Bears point out that the Four-Year-Presidential-Cycle begins a new cycle in January, and the first two years of the cycle are almost always the least favorable for the economy and stock market, no matter which party is in the White House. That’s because almost every Administration since the early 1900s has allowed the economy and stock market to take whatever hits they need (to correct excessive conditions) in its first two years in office. Each Administration has then pulled out all the stops with whatever degree of Federal spending and stimulus packages are needed in the last two years of its tenure, to make sure the economy and market are in recovery mode when re-election time rolls around again. Bulls point out that even if that pattern is to take place in the next Four-Year Presidential Cycle, before it begins the market will enter its favorable seasonal period of November to May, when historically the market has made most of its gains each year. I have often called your attention to the importance of the market’s seasonality, since my work a number of years ago showed that harnessing that seasonality, with help from technical analysis, would have tripled the total return of the S&P 500 over the last 50 years. That research led to the development of my newsletter’s Seasonal Timing Strategy, which was introduced publicly in my 1999 book, Riding the Bear – How to Prosper in the Coming Bear Market. It was the book’s recommended strategy for continuing to make profits in the bear market that I expected. However, even though the strategy continued to perform well through the bear market, tripling the return of the S&P 500 for the six-year period from 1998-2003, within that performance the Seasonality Strategy lost 7.3% in the year 2000, the last election year. The odds seem to be rising that we could see a repeat this year if the catalyst for the decline in 2000 was the turmoil surrounding the election results. It’s no secret that the market hates uncertainty. At election time in 2000 the S&P 500 was down just fractionally from where it began the year. But as soon as it was realized that the election had not produced a clear winner, the S&P 500 immediately headed south and was down 8% by year end, and 23% by the following April. The more volatile Nasdaq was down 27% by year-end, and 52% by the following April. The uncertain election results were not the reason for the market decline. As it turned out, the economy was headed into the 2001 recession. But the market had been holding up well, and needed a catalyst to head south in anticipation of that recession, and the election results provided that catalyst. This time around it looks like the election in several key states could again be too close for conventional vote counting to provide a clear result. Already both sides are reported to be readying for recounts and legal actions. In the background are numerous worries, but as in 2000 the market continues to hold up quite well. In last week’s column I pointed out how consumer confidence, and the stock market’s direction in October, have pretty good records of predicting the winner in Presidential elections. However, it might be more important for investors to realize that if this dead heat in the run-up to the election ends with uncertain election results again and a period of legal infighting, the election might turn out to be just as good a predictor of market direction. Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.