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It is that time in the presidential cycle that gets
everyone emotional and concerned with the future outlook of the United
States. While everyone has their opinion on whom
they think is best for America, I promised myself a long time ago to keep my
thoughts to myself for two key reasons. ONE: only 50% of Americans will agree
with me J, and TWO: I am Canadian so I do not experience what Americans go
through on a daily basis.
My thinking is if Obama wins then we will see
Quantitative Easing continue. And with the recent positive economic numbers
on Friday it should give some confidence to investors that things are SLOWLY
stabilizing (Bullish for Stocks). But, if Romney wins then we could see
Quantitative Easing be cut or eliminated which is obviously bad for equities.
So, let’s just jump into the charts of what I
feel will unfold in the next few days and months.
Using the season chart of the four year election
cycle we can see what the Dow Jones Index has done in past election periods.
Obviously every market environment is drastically different in each situation
but overall we see stronger stock price. This is naturally a very emotional
time for investors but once the election is finished most individuals become
more confident simply because there is a leader that has four years to make
things better and there is nothing they can do about it now and the
campaigning and debating is over.
DIA
– Dow Jones Industrial Average – Daily Chart:
Looking at the chart of Dow DIA Index fund you can
see a 5-6 month cycle in the market which has a positive skew. Just so you
understand what a positive skew is I will explain.
Positive Skew is when the market is trending up
making a series of higher highs and higher lows. Because there are naturally
more buyers during a bull market each cycle upswing lasts longer then when
the cycle down downswing. So you get longer rallies which
sends your secondary indicators (stochastics,
volatility, put/call ratios, advance decline line etc…) in the
overbought levels for extended periods of time. Those trying to pick a top continually get their head handed to them. The
focus must be on buying the pullbacks. Keep in mind volatility is higher
which meaning risk per trade is higher. Overall in the long run you stand a
much higher chance of making money trading with the trend than trying counter trend trades (picking a top).
So as you can see below it looks like the stock
market will be trying to put in the bottom over the next week or two which
falls in line with our election cycle. It is very important to know that
during intermediate cycle lows is where some of the biggest drops take place.
These sharp drops are what is needed to cleanse the
market one last time to shake as many traders with tight stops out of the
market before it reverses and starts the next rally. I would like to see a
1-3 day market sell off as that would be the signature bottoming pattern I
like to buy.
Bond
Prices – Moving Against the Norm…
Bond investors are some of the most conservative
people in the market. They do not like to take risks so they dump their money
into bonds to make a tiny profit in exchange for low risk (volatility). The
nature of these investors put more money into bonds as we enter the election
because they are nervous about not knowing who will be in control of the
country.
After the election finished some money flows out of
bonds and into stocks because there is now a president and direction for the
country. Generally come the new year investors move
to bonds as the safe haven as they try to figure out what their game plan is
for new year.
So looking forward to this week and the next 2
months I would not be surprised to see bond prices rise or trade sideways
while stocks move higher. This analysis is based on Obama winning. If Romney
wins then I feel bonds will rally much more and stocks could sell off.
TLT
Bond Exchange Traded Fund – Daily Chart:
Here is a chart of 20+ year bonds showing a possible
reversal to the upside that could trigger as soon as next week. This chart is
forward looking 1 – 2 weeks. Overall the trend remains down but if
Romney wins I feel bonds breakout above the red resistance levels and trigger
a new uptrend. You can follow my stock charts and ETF charts
live every day here: http://stockcharts.com/public/1992897
Election
Year Trading Cycle Conclusion:
Next week is going to be very interesting to watch
unfold. I generally do not like to trade or invest before news of this
magnitude so trade smaller sizes if you do as price action could be wild.
Chris Vermeulen
Editor, the
Gold and Oil Guy
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