The presidential cycle, also referred to as the four-year cycle, is a predictive stock market theory that is based on the presidential election cycle. Every four years, the presidential election occurs, and in between there are specific timeframes that will outperform others.
Historically the stock market typically tops out during the first year of a new presidents term before bottoming in year two. During Obama's current term, the stock market topped out in April and the 52-week low was set in July. If the cycle works as it typically has in the past, the low will be set in 2010 and the average rally from that low to the high of the following year (2011) would be approximately 50%.
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As of today, the low of 2010 on the S&P 500 is 1010, set on July 1, 2010. A 50% increase from the July low would send the S&P 500 to 1515, the best level since late-2007, but not a new all-time high. The investment strategy was worked well over the last two decades. (For more, see The Market And Presidential Promises.)
A low was set in 1990 before the Gulf War and the market rallied for the next few years. In 1994, the market took a breather before breaking out at the end of the year to start another multi-year bull market. During 1998, there was a big sell-off in October that was followed by another rally that lasted several years. The bear market of the early 2000s came to an end in 2002, and yet another multi-year rally followed. Finally, 2006 was another year when a low was set before the markets rallied to a new all-time high in 2007.
The trend is your friend, and if the presidential cycle trend continues it will lead to more upside for stocks into 2011. The question is, how to play such a move.
During the 2006 through 2007 mid-term election year rally, the S&P 500 added 28% and the Dow gained 32% from the low in mid June, 2006, through October, 2007. Within the Dow, 28 of the 30 stocks ended with gains, and the only two losers were Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT), dropping 7% and 5% respectively. The big winners were McDonald's (NYSE:MCD), Hewlett-Packard (NYSE:HPQ), and Cisco (NYSE:CSCO).
The S&P 500 had two stocks gain over 300%, and a handful more than double during the 16-month period. Agricultural chemical firm CF Industries (NYSE:CF) and AK Steel Holding (NYSE:AKS) led all stocks with gains of 443% and 328%, respectively.
Within the technology arena, the big winners were Research in Motion (Nasdaq:RIMM), Baidu (Nasdaq:BIDU), Priceline.com (Nasdaq:PCLN) and Apple (Nasdaq: AAPL). Looking ahead at the next year, there is a case for all four of the past leaders to do so again. However, of the group the two stocks that continue to be the leaders in their industry are AAPL and BIDU.
ETFs also allow investors to stay away from individual stocks and focus on sectors. The top performing sectors were the metals and miners, chemicals and telecoms.
The SPDR Metals & Mining ETF (NYSE:XME) gives investors broad exposure to the industrial and precious metals. There is no ETF that is specifically dedicated to chemical stocks, however the SPDR Materials ETF (NYSE:XLB) has a large concentration of stocks in the sector. The iShares Dow Jones US Telecommunications ETF (NYSE:IYZ) will offer exposure to U.S.-based telecoms and pays a decent dividend of 4%.
The Bottom Line
As you may know by now, history does not always repeat itself in the stock market. Keep that in mind, when deciding to invest. (For more, see Market Cycles: The Key To Maximum Returns.)
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