Long road for market direction

Last Friday we had an unusual day in which gold, the US dollar and the markets all closed positive. Gold spot price closed 1.22% higher at 1,814.60, the Dollar Index closed at 76.60 for a 0.47% gain, and the Dow Jones had a final level of 11,509.09 resulting in a 0.66% advance.

Normally these three do not trade in the same direction, having more of an inverse relation between them, which is why we are thinking right now of disarray in the markets with the resulting drop in the next days. However one day does not make a tendency so we will have to wait this week for clarification.

Unfortunately we can’t wish the markets on a direction; the most we can do is exam the possible scenarios and then be ready for action.


The Dow is trading inside a perfect parallel lines channel, it is very difficult and most of the time unprofitable to trade inside a price channel, it is better to wait for the breaking of any one of the lines that will signal the future trend.

We have several possible outcomes for the market in the following weeks:

a) The market keeps going up, breaks above the upper channel line and signals definitively a new uptrend for the markets. That will be the moment for covering all the shorts and start looking for the best groups to go long.
b) The Dow keeps going up but stops right before breaking the upper trend line, around 11,800, and then starts down. If that is the case, you can start your short positions and be in the look out for a violation of the lower trend line. The target will be Dow Jones around 10,700.
c) The Dow Jones stop its five days run and start going down next week, then a triangle like formation will develop before the breaking of the lower trend line. You can start building your short house around the time of the formation of the triangle. The target is Dow Jones around 10,460.

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.