Where Are We in the Presidential Cycle?

The year that was 2012 is now officially in the books. There's nothing more we can do about it and can only look forward into 2013. As you guys know, we like to use a top/down approach and start our market analysis from a historical perspective. We then and work our way down asset by asset, sector by sector, and pick entry points based on VWAP and combinations of intraday moving averages and polarity.

But as we enter the new year, we believe that it's important to recognize some of the cyclical effects that could impact our portfolios. Today, Alex Tarhini breaks down the Presidential Cycle to see what 2013 may bring. Here are the stats:

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Within the Presidential Election Cycle, 2013 is considered a “post-election” year. To understand what that implies, we took Dow Jones Industrial Average data going back to 1929 and found the following average returns for each part of the cycle.

Of all four years in the cycle, the post-election year has results that are far from the strongest year in the cycle, the pre-election year. Along with that, its batting average is the weakest, having a positive return only 48% of the time. In addition, the post-election year tends to have a higher standard deviation compared to other election cycle years, further detracting from any reliability in this point of the cycle.  Post-election years also underperform on a relative basis when comparing not only to other years in the Presidential Cycle, but also to the average of every year going back to 1929 (the “one year cycle” in the table above). Post-election years averaged a 4.45 % return compared to a stronger midterm (+5.01%), pre-election (+12.87%), and one year cycle (+6.78%).

While this certainly doesn’t provide any tailwind for the market from a statistical standpoint, it is also only a single data point and thus should not be overvalued. It is important to understand and consider the many other ongoing time and seasonal patterns in the marketplace.

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Later on this week we'll take a look at the Decennial Cycle and post our numbers on a composite index that we create combining multiple historical stock market cycles. We like to use this data to set up a "road map" of sorts for the year to come. The power in the numbers stands out when the market behaves differently than history would suggest. In times like that, the marketplace is telling us that there are larger forces at work and that we should probably pay a little closer attention.

Make sure to follow Alex on Stocktwits @TarhiniTrade

Tags: $DJIA $DIA $YM_F