Alpha Power Investing NewsletterMay 10, 2013
With the Dow Industrials now trading above 15,000, the Wall Street propaganda machine is moving into high gear. Many pundits are proclaiming that a new bull market has begun. Mutual funds are recording record inflows of money into equity funds - a complete reversal of the outflows that have dominated the past several years. Market corrections are few and far between, as investors take every dip in stocks as an opportunity to buy. Margin debt is now about the same as late 2007, a market top.
It seems like the investment public has decided that the risk of owning stocks has gone away, thanks to the eternal QE (quantitative easing) of Mr. Bernanke and the Fed.
As for myself, I've done this over enough years to realize that my market insights and prognostications are no better than a coin toss - sheer guesswork covered over by a veneer of rationalizations.
Thankfully, there is a way to manage money over the long-term that avoids the guesswork about where the market is headed. This method is based on the recognition that the stock market is a human arena which obeys the laws of human psychology.
Let me give you an example of what I mean.
Since 1931, the five-quarter period beginning with the last quarter of the mid-term election year has not been down (Dow Industrials, total return). Over this five-quarter period, the Dow has appreciated an average 25.6%. Add in dividends, and the average total return comes close to 30%.
What makes this five-quarter period so robust is simple - politics.
By the time the mid-term elections roll around, the political class has turned its attention to the next presidential election. Incumbents know that the odds of re-election are high if the economy at election time is humming along. Not being complete idiots, politicians reverse course and pretend to be fiscally-responsible public servants. Grand schemes are tabled until after the next presidential election.
This deception plays well on Wall Street. It's no surprise that many of the worst bear markets occur in the eighteen months prior to the mid-term elections. Since there is no certainty in the investment world, we can reasonably say that the odds are quite good that the market will be rewarding during this five-quarter election cycle "power zone".
To demonstrate the efficiency of this assumption, let's take a look at the previous six election cycle "power zones" which takes us back to 1990. In my example, I divide my investment into two equal parts - the S&P 500 (which gives me exposure to blue chips) and the NASDAQ 100 (which gives me exposure to large technology companies).
Pretty amazing, isn't it ... outperforming the market over a 20-year period by just holding stocks for five quarters every four years.
Admittedly, the last two "power zones" have been anemic by historical standards. I attribute this to the general overvaluation that has plagued the market since the late '90s. The next election cycle "power zone" may also be disappointing, but it's reasonable to assume that it will be profitable (especially if it is preceded by a substantial market decline).
Our program called "The Formula" utilizes the election cycle "power zone" as an element in its investment formula. This is combined with the cyclical regularity of the "annual forecasting cycle" (robust markets from late-October to mid-May), to create a complete and highly successful long-term discipline. We also use this discipline as our investment model for our 401(k) WealthEngine subscription program because it is so easy to understand and to implement ... with no guessing.
Sincerely yours,1-877-229-9400, Ext. 11
Jerry Minton, Ph.D.
Past performance is not a guarantee of future performance.
© 2013 Alpha Investment Management, Inc.