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Mid-Term Election Year Seasonality: Flat Year Ahead at Trader’s Narrative

The new year invariably brings a plethora of forecasts, predictions and estimates. With that in mind, here’s a preview of what’s to come through a political prism. Since the 1950’s mid-term election years have been more or less flat for the Dow Jones Industrial Average.

That’s especially true of the first nine months of the average mid-term election year. As you can see from the chart below, the usual mid-year doldrums, made famous by the market maxim: “Sell in May and Go Away!” can be expanded to “It Isn’t Over, ’til October!”:

mid-term election year seasonality pattern Dec 2009
Source: Chart of the Day

A theory to explain this seasonality pattern is that usually, the politicians in power choose to enact unpalatable economic policies early on so that by the end of their days in power, they can focus on attracting votes by spending and stimulating the economy. Of course, that normal pattern was upended during this political cycle as the Bush administration initiated the ill-thought out and gargantuan TARP program - which was continued by the Obama administration.

The important thing is to remember that this sort of analysis is really background chatter to other more immediately relevant variables. Who can forget that at the start of last year, the election year cycle pattern ‘predicted’ a positive year.

Finally, it is important to note that 2010 will coincide with the powerful 4 year stock market cycle. This little known phenomena doesn’t really have a convincing explanation but as market voodoo goes, it is uncanny.

Going back more than 100 years, this repeating pattern has flagged major buy points in the past 22 out of 27 cycles. The five years making up the exception to the rule were: 1946 (flat), 1930 (ouch!), 1910, 1906 and 1902. To see a huge chart showing its track record, check out the previous link.

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