Do Stocks Always Rally Following the Midterm Elections?
The market does not always rally following the midterm elections. Let’s take a look at the statistics.
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Raise your hand if you don’t know the statistic about the market in midterm election years. I see no one is raising their hand. Okay, maybe one of you doesn’t know that, in something like the last fifty years, the market has always been up in midterm election years. I’m paraphrasing, but that’s the general gist of it.
Long-time readers know I’m not a huge fan of seasonality. If it fits with my market view and the indicators line up, then I’m all for it, but I am not going to trade on it. In fact, I can guarantee you that when one of those seasonality statistics pops up that works like 99% of the time, if I trade it based on the seasonality, I will catch the one time it doesn’t work.
With that as background, I saw a table with some stats about Halloween seasonality last week. I will not share the table with you since I don’t have permission to share it, but in general terms, the last four trading days of October through the third trading day of November shows 36 instances, and the Nasdaq 100 is up 80% of the time during that stretch. You don’t need me to tell you it hasn’t been the best stretch for Nasdaq.
The S&P, the table says, is up 75% of the time in that period of time for an average gain of 1.6%. My math says that unless the S&P rallies 100+ points by the end of the day Wednesday, this will be another miss for this particular seasonal trade. And to tack on 1.6% would clearly be a rally of epic proportions.
Yet I see that the trade worked spectacularly for Nasdaq from 1990 to 2005. There was not one down year. Impressive. 2006 and 2009 brought some red, as did 2016 and 2018. But in the last four years, it turns out Nasdaq has been red three of four of them. So if this year clocks in as red, that will make it four of the last five years, or 80% of the time it didn’t work.
That’s a long way of saying just because the market has been up in the last gazillion mid-term election years doesn’t mean it always will be. In fact, I would bet in most of those years the S&P had fallen more than 3% prior to the year-end rally.
Now, if we can get the VIX jumpy. If we can get the put/call ratio up. If we can get the sentiment indicators to show some solid fear, I would happily jump on the midterm cycle rally bandwagon.
Otherwise, we seem to be trapped in an Either/Or Market, and if you can’t get everything to move at once, it’s hard to get sentiment to change drastically since there is always somewhere to run to.
The others are overbought, so it’s their turn for a pullback. We can tell when we watch the number of stocks making new highs because they haven’t expanded in two weeks.
