STRATEGIES

With 2012 the final year of the presidential cycle, Tom Aspray points to historical patterns in election years that suggest this year could be one that will defy the old adage of “Sell in May and Go Away.”

Even though we have just begun the month of May, there has already been much discussion in the financial media about Wall Street’s most popular adage “Sell in May and go away,” and truthfully, many investors now regret not selling in May 2010 and 2011.

Of course, this old adage is based on the average monthly performance for the stock market, and a quick Google search will provide you with a large number of opinions about why you should or should not follow the advice in 2012.

Since this is the fourth year of President Obama’s term, there are some different historical forces at work. As Jim Stack points out in this recent interview, “There is only one presidential election year since 1940 that has seen a double-digit decline in the Dow, and that was 2008. Now on the flip side of the coin, if you look at how many presidential election years have seen double-digit gains since 1940, there have been seven of them. Those are the kind of odds that investors have to like this year.”

From a technical standpoint, it is the price action that tells me whether to get in or out of the market in any month or any year. Therefore, I wanted to look at the charts of the market during several different election years, starting with the historical charts for 1936, a year which some economists fear could be very similar to 2012.

In 1936, the economy stayed in recovery mode after the Depression, but then, in 1937, recessionary forces again took over. It eventually took World War II to turn the economy as well as the stock market around.

The historical charts of 1936 revealed some interesting similarities to 2012. The percentage change chart of the Dow Industrials shows the strong 10% rally in the first quarter, which peaked on April 10, 1936. The Dow then reversed sharply for three weeks and lost 6.7%.

chart
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By the second week of June, the Dow had started a new uptrend that carried higher until early 1937. From the May lows until the end of the year, the Dow was up 18.2%. In early 1937, the Dow added another 10%, but by October 1937, it was below the May 1936 lows.

So what did some of the modern technical tools tell us about the market during this period? Though it had not been invented yet, one of my favorite technical tools, the on-balance volume (OBV) indicator, which was developed by Joe Granville, gave some very interesting signals.

(It should be noted that ever since the OBV became available in computer software over 30 years ago, my methods of analyzing the OBV have differed from Mr. Granville’s.)

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