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Business
Market Radar: The Meaning of Mid-Terms
Saturday, October 2, 2010
Bill Sarubbi
By Bill Sarubbi
Cyclesresearch.com
This time I would like to talk about the recent rally, as well as the importance of mid-term election years. We will then finish up with our usual discussion of oil and gold.
The stock market rose despite the downturn in the cycles. Short-term, the market is likely to fall early in October but to begin to rally later in the month. The S&P is now overbought on a daily basis. And, the AAII poll shows that there were 21% bulls on August 28th and 43% bulls on September 29th. This reflects a great increase in optimism, which is bearish utilizing contrary opinion. The 10-day moving average of new highs less new lows has not made a new high. The 10-day advance-decline line is also falling, so it appears that this rally has finally losing steam.
There is a strong tendency for the market to rally from the mid-term elections. First, mid-term election years show annual returns (4%) that are about half that of the average year (7%) from 1930. From the mid-term election year cycle low to the pre-election year high, the S&P tends to appreciate on the average of about 48% over an average period of 15.5 months.
The market has been up from the mid-term low to the end of the following year in every year since 1934. The highest return was 83% in 1954-55 and the lowest was 8% in 1946-47. In 19 cases, the low was in January five times and in October five times. All of the January lows fell in longer-term bull markets. Four of the five October lows occurred during longer-term bear markets. In bull markets, the cycle bottomed early in the year, but it bottomed late in the year during bear markets.
In addition, in two cases there were lower lows after the mid-term election years, but these were minor. These were -3.6% in 1935 and -2.9% in 1947. There have been no such lows in the months of September or in November in mid-term election years. There have only been 2 lows in the summer months, July and in August. Distinguishing between bull and bear markets, most such lows are in the second half of the year.
Oil
Oil is trapped in a trading range. The top of the range is now $82, which is now resistance. Daily oil is overbought, but the weekly picture is not as extended. I doubt that oil will break out of the range now. It is entering the weak part of its cycle, September 29-December 11, during which oil has fallen 71% of the time for an average decline of 10%. The cycle composite turns down on October 3rd, so it is likely that oil will drift to the lower end of its range from this point.
Gold
October is a volatile month for gold, so there may be some weakness in the second half of the month. Looking at the annual cycle, the second half of October is the single weakest period of the year for gold prices. The period that we are currently in, early August to mid-October is the strongest. The period from October 13 to November 1 is the most bearish, gold having fallen in 21 out of 31 years. By the way, I just updated these numbers from 2007 to 2010, and it is amazing how the dates did not change. The magnitude of the moves has changed because gold has been in a bull market.
Looking at the technical picture, gold has broken out of the ascending triangle as expected. It has not yet hit its objective in the $1350-$1450 range. I expect this to occur by mid-month at the latest.
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