The following article was originally published in The Option Strategist Newsletter double issue 19:10-11 and has since been featured on MarketWatch.com.
The "Presidential Cycle" is a seasonal tendency that has a strong track record. Simply stated, the Presidential Cycle includes a major market bottom in the mid-year between presidential elections -- which is this year.
This indicator usually receives a good amount of publicity in the year that it predicts a buy signal. However, this year, I haven't seen any articles on the subject -- save for the annual mention in "The Stock Trader's Almanac."
Simply stated, the theory is that the market follows a four-year cycle that roughly corresponds to the cycle of U.S. presidential elections. The technical part of the system is its seasonality, but there are also fundamental reasons why it seems to work.
The market usually tops in the year after the presidential election, as the new president prepares to take on any negative aspects of administering early in his term (the reasoning being that, four years later, most voters will have forgotten the negative things). The market then declines into the second year of his term -- the mid-year between elections. Sometime during that year (often, in the fall and in October, in particular), the market bottoms and then rallies through the third and fourth years, as the economic "pump" is primed in order to make things prosperous for as many as possible, prior to the next election.
This is, of course, just a generality, but the Cycle has a strong track record, especially the part about bottoming in the mid-year between elections. There is ample evidence of strong market bottoms in the second year. Massive bear markets bottomed in 1970, 1974 and 2002. There were also severe corrections in 1938 (as we well know from our June Trading Strategies article on that subject), 1942, 1946, 1962, 1966, 1978, 1982, 1990, 1994 and 1998 that bottomed in the mid-year and led to very strong rallies.
To continue reading the story, visit: http://www.marketwatch.com/story/pegging-the-bottom-of-the-presidential-cycle-2010-09-01