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%.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

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.

Past Winners
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.

Industries
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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!