Alpha Power Investing Newsletter

December 31, 2009

Dubious in 2010

Forecasting the stock market is a dubious business. I honestly cannot remember a year that came out close to how I imagined it would be. That statement covers about 25 years, so you can see why I call my forecasts "dubious".

But I'm not the only one who gets it wrong. There is a vast army of highly educated, well-paid, knowledgeable, and dedicated "experts" who systematically miss the big events of the near future. Even when a handful of them come close to getting it right, they are almost certain to be off the mark the next year.

If I've learned anything about this business, it's to avoid gurus - being consistently right about the near future (12-18 months) is impossible.

Nevertheless, investors are addicted to forecasts, so here comes my dubious contribution to the annual ritual.

The best forecasting tool I'm aware of is the Presidential Election Cycle. Regardless of the state of the economy, this four-year cycle does contain useful information. The most fundamental fact about the election cycle is that it creates a 15-month "power zone" which starts just before the mid-term elections. This five-quarter period hasn't been down since 1931, averaging just under 30% total return for the Dow Industrials over the past 79 years. During this period, the market's return has been about four times greater than average. This "power zone" starts October 1, 2010.

Normally, the "power zone" is preceeded by a healthy market correction or the end of a multi-year bear market. It seems that investors get pretty nervous from June to October before the mid-term elections. The third quarter of the mid-term election year has been the worst quarter in the cycle. The Dow has lost a total of 3500 points during this quarter since 1900.

To sum it up: Year two (2010) of the election cycle contains the worst of times and the beginning of the best times. Based on historical performance, I'd bet on a hefty market decline from June to October, then a strong year-end.

Jerry Minton, Ph.D.

© 2009 Alpha Investment Research Inc.
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