Don’t bank on the presidential cycle in 2015

Seasonal market patterns seemingly suggest the recent market rally is just the beginning.

Historically all market gains have come during over the November-April period. Additionally, fans of the presidential cycle indicator note that the third year of a president’s reign is typically extremely strong, boding well for 2015.

"When the best six months and the third year of the presidential cycle have been active at the same time, the results since 1960 have been outstanding," says Rob Hanna of the Quantifiable Edges blog, with gains being recorded in all 13 of those cases.

Whatever about the next six months, there are reasons to doubt the case for the presidential cycle in 2015.

Typically, presidents stimulate the economy as elections draw nearer and get the ugly news out of the way early in their reigns.

That’s why gains in Years 1 and 2 are typically poor. How poor? Urban Carmel of the Fat Pitch blog notes that bear markets or recessions have ended just before Year 3 in 18 of the last 21 presidential cycles.

The “single most significant feature explaining why Year 3 has been so bullish”, notes Carmel, is that the period leading up to it has been “decidedly bearish”.

The last two years have been completely different. The S&P 500 soared 30 per cent last year and is up 10 per cent in 2014. It has risen for the last 7 quarters.

The Dow is on track for an unprecedented sixth consecutive annual gain of at least 5 per cent.

In short, this time is different; the seasonal case for a strong 2015 is less robust than appears. End of the gold rush? Gold has been having a hard time of late, last week slicing below the $1,180 level that has acted as technical support over the last 16 months.

Now trading at its lowest level since 2010, it’s on track for its first back-to-back annual declines since 2000. It has fallen 40 per cent since peaking at $1,920 in 2011.

The idea the bubble has completely deflated is hard to make. George Soros described gold as the "ultimate bubble" in early 2010, when it traded around today's levels.

A paper last year calculated gold’s long-term average valuation is around $800, which would coincide with a return to 2007’s pre-crisis levels.

The irony, as hedge fund trader Mark Dow noted last week, is that "it was the guys yelling 'bubble', bubbles of every stripe – bond, stock, credit – who sought refuge in the only asset class that was truly in a bubble… the fear of bubbles created its own bubble, trapping the bubblers".

So great was the gold rush in late 2011, the main gold exchange-traded fund briefly became the largest ETF in the world. Since then, the bubble has been unwinding. Gold will enjoy short spurts higher, especially when technically oversold, as it is now.

However, selling into rallies continues to look like the obvious trade. Fighting the market Gold bugs can be an ideological bunch; rather than viewing market action as a rejection of their thesis, they see the last three years as a mere hiatus before gold rockets to $5,000 and beyond.

Fighting the market is an expensive business, however, as stock market bears can also testify. The S&P 500 has long looked expensive. That hasn’t stopped stocks from hitting new highs. October’s rapid recovery means the S&P 500 has hit new highs each month since July 2013 and on 36 occasions in 2014.

Concerned investors can rotate out of the US and into cheaper assets, knowing this usually reaps long-term rewards. Traders, however, are better off not having an opinion on what the market should do, but instead focusing on what it is doing.

Jason Goepfert of the SentimenTrader website notes that 43 of 85 measures he tracks showed unusually high levels of pessimism at the market bottom in mid-October – something only seen at intermediate-term lows. Subsequent rallies typically last for several months, he says.

In other words, continue buying the dips. Boot-licking analysts Sometimes, analysts turn bullish on a stock because, well, they changed their minds. Other times, their motives are less honourable.

A new study examines analysts who go to work for firms they have been covering.

In the year before being hired, there was a “marked change” in reports, with the analysts upping their price targets and becoming much more optimistic towards the would-be employing firms.

They also issued more reports, perhaps hoping to impress their would-be employer, and became much more pessimistic about other firms, “underscoring just how positively they view the companies that eventually hire them”.

Far from being independent, the study suggests, the analysts are simply trying to curry favour with their would-be employers.

See http://goo.gl/ezxzN4