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  • Article The Presidential Cycle: Useful or “Rubbish”? by D. R. Barton Jr.
  • Trading Education How to Get A Refund on the Jan 12 Workshop
  • Ken's Class Mini-session on a 16R Trade Last Week by Ken Long
  • Trading Tip Principles of the Conscious Mind by Van K. Tharp, PhD

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The Presidential Cycle: Useful or “Rubbish”?

The U.S. presidential election is behind us, but the effects of the election will drag on. Already, worries over a stalemate between the Republican dominated House, the Democratic Senate, and the White House are weighing on traders’ and investors’ minds. In particular, the markets are voting a decided “no” on whether it thinks anything will happen to relieve the upcoming fiscal cliff (the mixture of tax increases and spending cuts set to take place at the end of the year).

The fiscal cliff is not the only issue coming up for the markets; many blogs, articles and TV segments are tossing about the well-known “presidential cycle” for stocks. These media mentions tend to point out mostly that the year after a presidential election is the poorest performing one of the four-year cycle.

Today, let’s take a look at the presidential cycle, what the supporters and detractors say, and see if we can draw any conclusions.

Presidential Election / Stock Market Cycle – Why All The Fuss?

The presidential election / stock market cycle was popularized (perhaps even originated by) Yale Hirsch in his well-known Stock Trader’s Almanac. To quote Hirsch,

“Presidential Elections every four years have a profound impact on the economy and the stock market. Wars, recessions and bear markets tend to start or occur in the first half of the term; prosperous times and bull markets in the latter half.”

Hirsch provides data going back to 1833 for each year in the cycle and shows these results (through 2010).

Year:

Post-Election

Mid-Term

Pre-Election

Election

Total Gain

86.1%

176.0%

464.0%

254.5%

Ave. Annual %

2.0%

4.0%

10.5%

5.8%

# Up Years

20

25

33

29

# Down Years

24

18

11

15

In statistics-speak, there seems to be a descriptive advantage in the second half of a presidential term, with the pre-election year showing the strongest results and the post-election year vastly underperforming the others.

Does the Presidential Cycle Even Offer a Trading Edge?

It seems like everyone with a keyboard has been writing about the presidential cycle at some point this year. One article in particular was totally dismissive about the statistical validity of this rather unique seasonal pattern. Since I’m about to blast him, I’ll not mention a name, but the short version of his argument was that stock data before 1900 was not valid (fair enough) and that the remaining number of cycles since then (27) did not meet the standard for statistical significance that he quoted as 30. Really? And he ended the article dismissing any seasonality claim with no further discussion.

Before we dig into the statistical argument, would you allow me to amend Twain’s quote and add a fourth type of liar? I would add the inadvertent liar who doesn’t understand statistics in the first place. I’ll try not to bore everyone out there with a discussion on statistical significance but if you’re looking for detailed mathematical descriptions of chi squared distributions, Google away…! I’ll state that 30 data points in a sample is only a rule of thumb, not a statistical barrier or certainty. So categorically saying that 27 data points gives garbage results while 30 would be just fine is either naïve, inflammatory, or both.

To see if the presidential cycle concept has any merit, I did a very brief literature search and found a peer reviewed paper that was published in the Journal of Portfolio Management by Beyer, Jenson and Johnson entitled “The Presidential Term: Is the Third Year the Charm ?”. Mr. Beyer, et al, apparently did their analysis and found statistical significance for the second half of presidential terms being stronger and the third year, in particular, being the strongest.

In addition to Hirsch and the journal paper mentioned above, the New York Times reported Ned Davis Research’s independently developed numbers for the presidential cycle as follows: 5.5% for year 1 (post-election in the table above), 3.7% for year 2(mid-term), 12.6% for year 3 (pre-election) and 7.5% for year 4 (pre-election). As you can see, Davis’ research supports Hirsch’s original thesis.

So, Does Anyone Use It?

Many of the traders and researchers I work with on a regular basis do, in fact, pay attention to presidential cycle. My good friend and stock research guru Marc Chaikin spent a good bit of time on a major TV financial show discussing the cycle and its effectiveness. In the same New York Times article mentioned above, no less a trader and analyst that Jeremy Grantham says that he and many money managers “will make bets based on the current (presidential) cycle”. As I have mentioned in articles before, Grantham’s track record and clear thinking make him a person I go to often for insights.

So what should the average retail investor / trader do with this information? The answer to that question depends largely on your time horizon. 2013 could be shaping up as a down year based on several major factors: poor 3rd quarter corporate earnings just reported, the potential fiscal cliff, continued European debt woes and I would include - the least productive year of the presidential cycle.  Before acting in a big way, however, the prudent player will require price confirmation.

If you’ve found this article useful, thought provoking or both, I’d love to hear your thoughts and feedback – just send an email to drbarton “at” vantharp.com. Until next week…

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

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Ken's Class

A 16R Trade

Ken anticipated the possibility of some volatility in the markets on the day after the election last week and prepared a game plan to trade it.  Watch the following five minute video to see how he captured 16R in the morning session on November 7. 

If your first thought to Ken’s video is “That looks easy” remember how much coal Ken has shoveled (as he likes to say) to make such results possible: understanding his psychology, understanding the markets, thorough daily preparation, effective scenario planning, highly efficient execution of a strong performing system that fits him (high TQN and SQN), and  a powerful position sizing strategy.

http://youtu.be/yYTnGp_wRjQ


Trading Tip

The Conscious Mind’s Capacity

By Van K. Tharp

Through my courses, programs and consulting, traders learn that whatever you have in life right now is exactly what you want. It might not be what you think you want, but it is what you want. If what you have doesn't correspond with your conscious goals, it is because you have a lot of conflict and sabotage programmed into your unconscious mind. I have devoted a good deal of my work to self-sabotage and how to overcome it.

The Conscious Mind

I define the conscious mind to be everything you are aware of and the unconscious mind to be everything else. However, this definition can be expanded by comparing the qualities of awareness with the qualities of those parts of your mind of which you are unaware. For example, your conscious mind has four primary qualities that are useful to explore.

FIRST: It has a limited capacity for processing information.

SECOND: It is the seat of your intellectual capacities. It is responsible for such skills as planning, logical reasoning, higher order thinking, etc.

THIRD: It provides you with your sense of self. That is, your conscious mind helps you distinguish what is you and what is not you.

FOURTH: Lastly, your conscious mind tends to focus on those things that you do poorly.

More on Limited Capacity

You might think of your conscious mind as that part of you which is constantly thinking and chattering in your head. You think about such diverse thoughts as what you are going to have for dinner; how you should have gotten out of that last trade much earlier; why your spouse left the house without saying anything to you last night; that one of your upper molars is starting to bother you; and the fact that you need to exercise. Bits and pieces of difference thoughts such as these, plus thousands more, are constantly going through your head.

As you observe all of this, notice that you only have one thought at a time. Why? Because your conscious mind has a limited capacity for processing information. Psychologists estimate that its capacity is seven, plus or minus, two chunks of information. For example, if I were to give you a long list of numbers and ask you to repeat them, you probably could recall about seven of them.

Interestingly enough, because of the way we evolved, your capacity for processing information under stressful conditions decreases.  For example, imagine primitive man fleeing from a predator. One of our primary advantages in the evolutionary scheme of things is our large brain. It allows us to be creative, to plan, to develop tools, etc. Normally our brains get a large percentage of the blood supply flowing from the heart in order to sustain these functions. But under stress, that blood is redirected toward the major muscles, such as the legs and the back, and away from the brain. As a result, you can run faster or you have more strength to fight. But at the same time, conscious processing capacity is reduced dramatically. And what typically happens is that you keep doing what you are already doing only with a lot more energy. This is not a particularly effective response for traders.

Thus, one of the secrets of trading success is to use more unconscious processing capacity.

About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.vantharp.com.

 

His new book, Trading Beyond The Matrix, is expected for publication March 2013.


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