Election Cycle Positive for Q4

11/14/2012 10:00 am EST


Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Jeffrey Hirsch discusses the seasonal trend in the fourth year of the presidential cycle, and whether an incumbent or challenger wins is typically better for stocks.

[This interview took place just after the first presidential debate, so before the election results were known-Editor.]

We're talking elections with Jeff Hirsch. Jeff, the election is just around the corner. What's the seasonality of an election year cycle?

Well, the Dow has been tracking an incumbent winning track all year long, up until I think the other night, when we had the debate where it looked like President Obama was sort of sandbagging a little bit. Romney looked like he was having a really good time. He spoke well; comfortable in his skin.

So it remains to be seen, but the market usually goes up more in election years when the incumbent wins. October itself is usually stronger when the incumbent wins, and, you know, it's good for gains throughout the year. When sitting presidents are running, there's usually average 9% gain for the DOW. We're above that already, so it's a positive for the market that there's a president in office running, whether he wins or loses.

The only problem with it is that the year after the election is where the difficulty seems to come, regardless of incumbent win or loss, or which party. Plus, it's the worst year of the four-year cycle, and we're rising so much in this election year.

I'm concerned. It reminds me of a lot of election years from the latter part of the 70s and early 80s, where you had those election-year highs or early post-election, like 73 or 74. We had a September top in 76, and then 77 and 78 were pretty rough. Then we had a top in 81 and then we just ran down a little bit of August 82.

I think we'll have some gains in the fourth quarter here moving forward, but I'm concerned for next year.

So, it sounds like a little bit of a trader's market than really just getting in for the long term, unless you're taking out 2013 as anyplace where you're hoping for gains.

Not necessarily taking it out, but we're going to get more cautious and see what the market tells us. A lot of the cycles that we cover in my new book, The Little Bock of Stock Market Cycles, focuses on some of the monthly and seasonal trading patterns.

Everyone knows sell in May and go away. We have the best six-month switching strategy, which will get a signal in October, sometimes later November. We use the MACD to get in there, so that's a trading move I think that will still pay off, though I'll be getting concerned in the March/April period of time.

We also have several sectors that are coming in by October. November 1 is the best time to buy stocks, but especially technology stocks, so we like the First Trust Internet ETF (FDN), the SPDR Semiconductors (XSD), and the telecoms. So, you know, all the tech sectors are looking pretty ripe right now, especially with Apple (AAPL) and the new gadgets coming out.

Right. Is that part of it? Is that why the tech sector usually looks strong at this and going into the Christmas season, and similar electronics?

I think a lot of it has to do with holiday shopping and all of the gadgets, new toys, and Xboxes and iPhones and all sorts of things that are being purchased. So look for gains in those sectors. Pretty good numbers historically.

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