Four year presidential Cycle

This Stock Market Cycle occurs with great regularity, it pays to be aware of it. According to Stan Weinstein in his book “Secret for profiting in bull and bear markets”, the cycle unfolds like this:
First Year: “But even more important is the reality that no matter who is elected, the year following the election is usually a disaster.”
Second Year: “Historically, the probabilities are strong that in the second year the bear market will continue until a bottom is reached around midyear.”
Third Year: “The third year of the presidential term is the best one of the cycle”
Fourth Year: “The fourth year, which is the election year, is a choppy one”

Data compiled for the last 20 years and six presidents, concurs with Mr. Weinstein description of the Cycle as we can see in the following table.


The Dow Jones returned an average of 8.60% in the first year of the presidential Cycle of the last six presidents, also there is only one first year with a loss for the Dow of the six first years, making the first year a winner in 83% of the time.

In second years, the Dow averaged a gain of 6.11%, slightly less than in first years; also the Dow had 2 losing second years out of six, making the second year a winner 67% of the time.

We are now running President’s Obama third year of the Cycle that it’s to end in October 31 of this year, the data for the past 5 presidents shows us that there is not a single third year loser for the markets, and the average is 20.85% gain for the Dow.

Let’s see now the monthly averages.


According to data found at moneychimp.com, from 1950 to 2009, September is the worst month for the markets overall, it has the lowest average return and also lowest percent of winning over the years. September is a wining month only 43% of the time over the last 60 years.
November and December are the best months for stocks, December is the winner overall, and the three months period from November to January constitute the best quarter run for the markets

What to expect? The Dow ended at 11,118.40 in October 29, 2010, finishing the second year of Mr. Obama presidential Cycle. The Dow closed this past Friday, Sep, 16, 2011, at 11509, so as of date the Dow is returning 3.52% in this Third year. There are 30 trading days left until October 29.
For this September the Dow is showing a 0.90% loss to date, keeping in line with September tradition.

We can fairly expect more zigzags or another drop until the end of October, after that it may pay to enter the markets again. Anyway REMEMBER, these are just statistics, at the end the stock market will do not what politics or the gnomes of Zurich want, but what the economy tells it.

Bermuda Triangle for the Dow??

After the Dow Jones Industrial dropped almost 16% from July 27 to August 10, some kind of consolidation pattern ought to form; a triangle continuation pattern appears to be in the way right now in the markets.




Look closely at the Dow Jones next week, if this proposed triangle forms, the end will be near the last part of the week. A break below the lower ascending line would confirm the conclusion of the formation, some times a return move takes the price to the lower line, sometimes a return move does not occur, after the breaking of the line the next stop for the Dow is 10,250.

Nature's Law ?

Elliot Rules, guidelines and interpretation

Two of the motive waves in a 5 waves impulse tend toward equality in time and magnitude, also wave 3 is never the shortest. Let’s see how these guidelines conform to this count.

Wave 1 from 12,724.41 to 11,866.62, 857.79 Dow points, 6.74% drop in 9 trading days.
Wave 2 up to 11,896.44 hum?
Wave 3 from 11,896.44 to 10,719.94, 1,176.50 Dow points, 9.89%, in 5 trading days.

Wave 5 should be equal to wave 1 or a 0.618 relationship, resulting in 857 or 529 points.

Sub Waves (1) (2) (3) (4) (5)
(1) from 11,896.44 to 11,383.68, 512.76 points, 4.31%
(2) to 11,444.61 retraced 11.88%
(3) from 11,444,61 to 10,809.85, 634.76 points, 5.55%
(4) to 11,239.77, retraced 68% of (3)
(5) from 11,239.77 to 10,719.94, 519.83 points, 4.62%

Total sub wave move from 11,896.44 to 10,719.84 is 1,176.60 points or 9.89% from 0, the 0.618 golden division is at 6.11% or a level of 11,169.57, very near wave 4 (less than 1%).

So if this wave count is correct we are in wave 4, let’s see where it takes us, it can be a straight up line but most possibly wave 4 will be a triangle that always occurs in wave 4.
The 15.75% drop in the Dow in 14 days should warn us that the market will take some time to consolidate.

A five wave Elliot pattern?

In this Dow Jones Chart and the accompanying table, let’s see if an identifiable Elliot wave pattern emerges.

Most of the times third waves are the extended ones, in our case wave III advanced the most, going from 11,934.58 to 12,719.49 for an impressive 6.58% gain in 8 trading days.
As wave I resulted in a 2.46% gain, the relationship between III and I is 6.58/2.46 or 2.67 times, very near the 2.618 Fibonacci number.

When wave III is extended, waves I and V tend towards equality, wave I with its 2.46% gain and wave V with 2.74% are very near correspondence, with only an 11% variation.

The golden section (0.618 – 0.382) is present in Elliot patterns.
When wave III is extended a textbook golden section forms in wave IV both in percent and in time. Wave 5 went from 11,897.27 at the start of I to 12,724.41 in our proposed end of wave V, for a 6.95% total gain in this movement. Now, the 0.618 part of this movement is a 4.30% advance from 0, resulting in a reading of 12,408.85.

12,408.85 is almost exactly our 12,385.16 level for fourth wave, also the 0.618 part of the 25 trading days is 15 days, the amount of time from 0 to the top of wave III.

They say chartists are guilty of seeing formations and patterns anyway they look at a chart and this could be no exception to that, patterns are easily identifiable after they end, that’s what makes speculating in stocks a very difficult art.

The following weeks will shed light about our proposed model; in the meantime my advice is extreme care with your long positions.

Elliot .......Anyone?

Wave (A) went from 12810.54 to 11897.27 totaling 913.27 units down, wave (B) length as of Friday’s close is 685.5, resulting on a 75% retrace of wave (A). If this is really a zigzag correction (because of the 5-3 A-B), the end of wave (B) must be near.



Let’s review the zigzag rules and guidelines:
Wave (A) always subdivides into an impulse or leading diagonal. PASS
Wave (B) always subdivides into a zigzag, triangle or combination. PASS
If wave (B) if a zigzag it will retrace 50 to 79% of wave (A). PASS as of Friday 07/01.
In a zigzag the top of (B) is lower than the start of (A). PASS as of Friday 07/01

The breaking of the 2-4 uptrend line warns us of a change of pace, also the S&P bullish percentages are in bear mode.


Sentiment: The 5% - five day gain of the DOW looks like a bull trap. Start looking for shorts or at least be very careful in your long positions. Parabolic SAR of your holdings or momentum should give ample warning.

Three long Ideas for Next Week

Virgin Media (VMED)

On February 17 VMED posted its strongest ever full-year financial results, revenue growth across all areas were up 5.8% Y v Y, and up 6.6% on a quarterly basis. Neil Berkett, Chief Executive Officer of Virgin Media, said: “A strong financial performance combined with the launch of a number of market leading product developments ensured 2010 was a year of great achievement for Virgin Media. We have driven our consumer division to its highest ever rate of revenue growth, maintained robust cost control and delivered our best ever financial year. The significant strides forward in our Mobile and Business operations contributed to this substantial result.”

After the earnings announcement, VMED traded on what appears like an ascending triangle with a flat upper line around 28. For more than 2 months buyers could not make up their mind about the stock price going above 28, then on April 20 VMED reported solid financial results again. Quarterly total revenue of approximately $1,600 million was up 5.7% year over year, quarterly free cash flow was around $162.8 million, up 117.7% year over year, and net income from continuing operations was approximately $7.3 million or 2 cents per share compared with a net loss of $266.2 million or a loss of 82 cents per share in the prior-year quarter.


VMED broke above the flat line at 28 and closed Thursday at 29.76 for a 6.3% increase above resistance.

The stock looks overbought with a strong possibility of a pause or a return move back to the support line which should take place on light volume. The big picture for VMED shows the stock trading at a 3 year high with no foreseeable resistance.

Measuring techniques give us a target of 32, for an 8% profit, a move below 27 will be a signal of exiting the trade for a 9.27% loss.

Crosstex Energy LP (XTEX)

Crosstex operates as an independent midstream natural gas company. The midstream natural gas industry is the link between exploration and production of natural gas and the delivery of its components to end-use markets. In North America, the industry includes approximately 1.2 million miles of pipeline, 525 processing plants and other facilities.
The Company was formed in 1996 to provide gas gathering, processing, transmission, distribution, supply and marketing, as well as crude oil marketing.
Crosstex has 500+ employees, with headquarters in Dallas, Texas.
Crosstex offers two equity securities for investment. Crosstex Energy, L.P. (NASDAQ: XTEX) is a master limited partnership (MLP) that owns and operates the assets of the midstream energy business. The partnership's equity is traded in common units. Crosstex Energy, Inc. (NASDAQ: XTXI), a corporation, is a holding company and the general partner of Crosstex Energy, L.P. Its equity is traded in common shares.

Let’s take a look at the following chart showing XTEX quarterly distributions and stock prices:


From November 2004 to November 2007, XTEX price was between 21 and 27 and the stock was yielding over 7% in yearly distributions. On 8/15/2008 the stock closed at 22.91 yielding at the time over 10% in distributions. Then on 11/14/2008 the stock closed at 5.24 with a yearly dividend yield over 45%, of course that was a warning of bad things to come and on 3/2/2009 on its 10K for the period ending 2008-12-31 the company announced that they will not be able to make distributions to unit holders in future periods until their leverage ratio does not improve and the PIK notes are not first repaid.

More than a year passed without distributions to unit holders from the payment on 02/15/09 to the next payment on 11/12/2010. Right now at 17.94 the stock is yielding 4.46%. The last quarterly distribution on the Partnership’s common and preferred units will be $0.29 per unit payable May 13 to unitholders of record May 2. If we assume at least an equal distribution for the following quarter, at current price the yield would be 6%, a little bit below the 2004-2007 yields above 7%.

Anyway, a stock breaking above its 8 week channel is worth some following. If entering the trade, the 16 level should act as support.


EMC Corporation (EMC)

On April 20 this IT company maker of storage computers, reported a 28 percent gain in first- quarter profit as companies increased spending on data centers capable of delivering tasks through the Internet.

Net income rose to $477.1 million, or 21 cents a share, from $372.7 million, or 17 cents, a year earlier, EMC said today in a statement. Sales rose 18 percent to $4.61 billion last quarter, exceeding the $4.5 billion average estimate. EMC reiterated its full-year profit forecast of $1.46 a share, excluding some items.


For nearly three months EMC traded in a range between 25.50 and 27.50, breaking above resistance on April 20 along with the strong quarterly results. The crossover of the ma(10) above the ma(30) accompanied with above average volume give us some hope of price increasing in the following weeks. The price should hold above 27.50 but a penetration below is a warning sign. A move below 25.50 definitely is a get out signal.

Quick Short Idea

This set up is only for January 13.

Olin Corp is set to announce on January 31.

Short at the close or very near, at 15 minutes or less to the close, at a price between 20.10 and 19.82, that’s a range of -0.99% to – 2.36% from Jan 12 close.

If you made the trade be aware of your stop loss level, at 20.35 is a range of 1.2% to 2.7% loss and the stock should not close above that level in the following two or three days.