We have
written about the success of the election cycle and how
well traders using the Electionomic Trader, a system
that got investors into the market for the two best
years of the four-year election cycle since 1833, would
have done. We have also discussed the impact the U.S.
election cycle has on a number of international markets
(see
http://www.electionomics.com/goesnorth.asp ).
Now
let’s focus on the best year of the four – the
pre-election year. Our backtests of the Dow Industrial
Average showed how the electionomic trader (being
invested for the two years leading up to each election)
would have fared
http://www.electionomics.com/graphs.asp. Individual
years are broken down at
http://www.electionomics.com/bestyears/ The results
speak for themselves.
But
here is another perspective on the best of the best –
the pre-election year. According to The Stock
Trader’s Almanac 2007, there hasn’t been a losing
pre-election year since 1939 when the Dow Industrial
Average lost 2.9%. The Dow has not had a losing
pre-election year in the 68 years!
There
were a lot of reasons for concern on the part of
investors in1939. Germany invaded Poland in September
which brought England and a number of countries in
Europe into war and threatened both global stability and
trade. Japan was also on an imperialistic rampage in the
Pacific having invaded China and would eventually launch
a surprise attack on Pearl Harbor on December 7, 1941
bringing American into the conflict. When you think
about it, what is more amazing is that the Dow only
dropped 2.9% in 1939.
Then
and Now
What
does that mean for 2007? One of the favorite indicators
discussed in The Almanac used to forecast the
year for the S&P500 (and Dow) is the January Barometer.
It says that as goes the month of January so goes the
rest of the year. According to the book, the January
Barometer has a .75 batting average since 1950. What it
is telling us is that if the S&P500 Index closes above
its December closing price of 1418.30, there is a 75%
chance that the S&P will have a positive year. It is
interesting to note that every negative January since
1950 has resulted in a bear or flat market without
exception. The SPX close on January 31 was 1438.30
so the January Barometer was positive.
What
does it all mean? Put the January Barometer together
with the fact that 2007 is a pre-election year and you
have an even better chance of a good year for stocks.
Figure
1 – Daily chart showing the up trend in the S&P500 since
its mid-July low of 1224.50 and bullish January flag
chart pattern. Note that the index closed above the
upper channel line of the flag pattern on January 31,
which is even more bullish. Chart provided by
VantagePoint software
www.TraderTech.com
In
short, since the S&P closed above 1418.30 on January 31,
there is a very good chance that 2007 will be a good
year on Wall Street, especially given that it is a
pre-election year with a 68-year positive history on it
side.
Stay
tuned here for more in the near future.
Matt
Blackman is a market analyst for
www.TradingEducation.com, a free educational website,
and is a technical trader, author, reviewer and keynote
speaker whose work has appeared in a number of major
financial publications, websites and newsletters. He is also
the host of www.Electionomics.com a website
devoted to investigating the impact of elections on stock
markets around the world. He is a member of the Market
Technicians Association (MTA) and Technical Securities
Analysts Association (TSAA).
