Of Note:

The conflict on the outlook for the equity markets through 2010.

The “Sell in May and Go Away” crowd is sitting on cash and waiting for an October low before getting re-invested. Also
known as the Halloween Indicator, the strategy is based on the belief that the period from November through April will
generate better returns on average than all other months.
.....

This is a mid-term election year in the United States and the mid-term election crowd believe an important low will occur
at anytime during the year because of the four-year mid-term election cycle.

.....

So now we have a seasonal strategy (sell in May) predicting an October low, and a statistical probability (mid-term election)
of an important low at any time during the year.

Are we to be invested now, or do we wait until the end of October?


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Carrigan: An October low is unlikely this year

By Bill Carrigan
August 21, 2010
TheStar.com



From time to time technical analysts will not agree on the outlook for the major stock indices, interest rates and commodities. The most common reason for the conflict is the influence of analytical noise from another methodology such as economic data, fundamental valuations or seasonal trends.

Right now the conflict centres on the outlook for the equity markets through 2010.

The “Sell in May and Go Away” crowd is sitting on cash and waiting for an October low before getting re-invested. Also known as the Halloween Indicator, the strategy is based on the belief that the period from November through April will generate better returns on average than all other months.

This would be classed as a seasonal or calendar strategy that is mostly associated with commodities. Traders believed that seasonality played a part in determining prices for commodities due to the weather effect on normal supply and demand for stuffs like grains, livestock and heating oil.

This is a mid-term election year in the United States and the mid-term election crowd believe an important low will occur at anytime during the year because of the four-year mid-term election cycle.

Here is a partial quote from the 1986 Stock Traders Almanac: “Mid-Term Election Years: Where Bottom Pickers Find Paradise – American presidents have danced at the Quadrennial and Quadrille over the past two centuries. After the midterm congressional election and invariable seat loss to his party, the president during the next two years jiggles fiscal policies to get federal spending, disposable income and social security benefits up and interest rates and inflation down. By election day he will have danced his way into the wallets and hearts of the electorate.”

This would be classed as a statistical probability because it deals with frequency over a long series of events - in this case 70-plus years of presidential cycles.

According to the 1986 Almanac, in all of the 13 presidential cycles over the past 52 years all but three market bottoms came in mid-term years, including the last six in a row. The updated data from the 2010 edition of the Stock Trader’s Almanac shows market bottoms in 1990 (Bush), 1994 (Clinton), 1998 (Clinton) and 2002 (Bush). There was no bottom in 2006.

Our chart this week is the monthly closes of the Dow Jones Industrial Average spanning about 20 years. I have marked the mid-term years of 1990, 1994, 1998, 2002 and 2006. Not shown are the major bottoms of 1970 (Nixon), 1974 (Nixon-Ford), 1978 (Carter) and 1982 (Reagan).





So now we have a seasonal strategy (sell in May) predicting an October low, and a statistical probability (mid-term election) of an important low at any time during the year.

This sets up an investment dilemma. Are we to be invested now, or do we wait until the end of October?

Clearly we need some unrelated analysis to sort out the conflicting strategies.

I have in the past used this space to explain the all-important intermediate market cycle, which will usually span about 22-plus weeks as measured from peak to peak. They are relatively easy to identify on weekly bar charts with the help of any simple momentum oscillator.

As a general rule the intermediate stock cycle will generate two cycle peaks and one cycle trough in a calendar year, or conversely two cycle troughs and one cycle peak in a year. If we apply our intermediate cycle study to the Dow Industrials or the S&P500 we can see that our first cyclic peak of 2010 occurred last April (15 weeks ago). When you add about 22 weeks (plus or minus) to the April/May 2010 peak you get the next idealized peak occurring sometime in early October.

In other words, an October low is not likely this year and barring any late October crashes we can also reasonably assume the recent July lows to be our first and only cycle trough in 2010.

A memo to the Sell-in-May crowd: You snooze, you lose.


TheStar.com

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