Political & Other Cycles Driving S&P 500, Maybe (excerpt)

Last week, I observed that the one-year periods following mid-term congressional elections and third years of presidential terms have been consistently very bullish for stocks. A few of our accounts reminded me that years ending in “5” have also been consistently very positive ones for stocks. Let’s review these cycles:

(1) Mid-term elections. Last Monday, I noted that our analysis of mid-term elections found that since 1942, the S&P 500 rose on average by 8.5% for the subsequent three-month periods, 15.0% for six months, and 15.6% for 12 months. There was only one out of the 45 periods that was down, and just for three months! One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results.

(2) Presidential third terms. I extended last week’s analysis of the presidential cycle from 1951 back to 1928 using daily data for the S&P 500. The average gain for the third years of presidential terms was 13.4%, well ahead of the averages for the first (5.2%), second (4.5), and fourth years (5.5). Of the 21 third years, only two of them were down during the Great Depression. The 22 first years and 21 second years each included 10 downers. The 21 fourth years included six negative ones.

(3) Years ending in “5.” There have been eight years ending in “5” since the start of our daily S&P 500 data. They all have been up with an average gain of 25.3% ranging from 3.0%-41.4%. By the way, the two-year gain for years ending in “5” and “6” averaged 37.6%, with seven of the eight periods having double-digit gains and only one period down by 5.2%.

Today's Morning Briefing: Gridlock & Goldilocks. (1) Three bullish cycles: Mid-term elections, third years of presidential terms, and years ending in “5.” (2) An anti-progressive, pro-business vote. (3) Review of Republican sweep. (4) Second “shellacking.” (5) Gridlock is bullish. Shutdowns are not. (6) Madison’s biggest fan. (7) McConnell’s impressive deal-making resume. (8) Employment report pushes the Fed to tighten sooner, but doves likely to focus on subdued wages. (9) Price inflation may be keeping lid on wage inflation. (10) “Stay Home” still the way to go. (11) “Interstellar” (-). (More for subscribers.)

Is Sentiment Too Bullish? (excerpt)

In the past, when sentiment, as measured by the Bull/Bear Ratio compiled by Investors Intelligence, was too bullish, the market often took a fall. Contrarians tended to turn bearish when the ratio rose to 3.00 or higher, and bullish when it was down to 1.00 or lower. Previously, I’ve demonstrated that the ratio works better as a contrary buy signal than as a sell signal.

In the current manic environment, I doubt that it will be a very useful sell signal. That was demonstrated by the latest correction, in my opinion. The Bull/Bear Ratio whipsawed from a recent high of 4.22 during the week of September 2 down to a low of 1.94 during the week of October 21. It rebounded to 3.62 this week. Most of the swings down and up were attributable to bulls jumping into the correction camp and then back into the bullish one. Remarkably, bearish sentiment has averaged just 15.4% since the start of September, the lowest since 1987, and below readings during the financial crisis of 2008-2009.

Today's Morning Briefing: Mood Swings. (1) Manic-depressive disorder. (2) Computers vs. humans. (3) Algorithms reading the headlines. (4) Bull/Bear Ratio’s latest bungee jump. (5) The bears have left the building. (6) The fourth phase of the bull market. (7) Don’t fight the central banks. (8) Don’t fight the political cycle. (9) Congressional mid-term elections and third years of presidential terms tend to be very bullish. (10) SMidCaps are rising and outperforming again for a couple of good reasons. (More for subscribers.)

Global Economy: Muddling Along (excerpt)

The ongoing decline in oil prices since the summer reflects a glut of supply rather than a sudden slowing in the global economy, in our opinion. I note that the CRB raw industrials spot price index remains range-bound since 2012, though it is near the bottom of that range. If it dives below it, I will have to reconsider my assessment of the global economy. Here’s a brief rundown on some other recent economic indicators:

(1) Europe. Manufacturing activity in the UK improved in October, while it remained subdued in the Eurozone. The UK’s M-PMI increased for the first time in four months from a 17-month low of 51.5 in September to a three-month high of 53.2 last month, boosted by domestic demand. The Eurozone’s M-PMI ticked up from a 14-month low of 50.3 to 50.6, the third reading just above 50.

(2) China. China’s official M-PMI fell from 51.1 to a five-month low of 50.8 last month. Growth slowed for production (from 53.6 to 53.1) and new orders (52.2 to 51.6), while new export orders (50.2 to 49.9) contracted for the first time in May, albeit slightly. The supplier deliveries measure was unchanged at 50.1. The employment measure ticked up from 48.2 to 48.4, its 29th consecutive reading below 50.

Today's Morning Briefing: As The World Turns. (1) Wild ride in S&P 500 Transportation. (2) Burning cheaper fuel. (3) Intermodal loadings at record high along with ATA Trucking Index and real business inventories. (4) Slow speed reduces odds of derailment. (5) A couple of hot capital spending indicators in GDP. (6) Gasoline bill cut by at least $100 billion. (7) Wage gains remain too low for Yellen. (8) M-PMIs show global economy muddling along. (9) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Valuations Not Too High for Central Banks (excerpt)

The combination of the recent weakness of forward earnings with the record-breaking performance of stocks has boosted forward P/Es significantly since mid-October. Here are the year’s peaks, mid-October lows, and Friday’s readings of the forward P/Es for the S&P 500 (15.7, 14.4, 15.7), S&P 400 (17.7, 15.3, 16.9), and S&P 600 (19.3, 15.8, 17.6).

The S&P 500 seems especially expensive relative to forward revenues. The same can be said for Q3’s ratio of the market capitalization of the S&P 500 to its aggregate’s revenues. The ratio rose to 1.66, the highest since Q1-2002. I suppose valuation multiples can continue to go higher now that we have the Kuroda Put. The major central banks and government pension funds are not value-oriented investors.

Today's Morning Briefing: Kuroda’s Put. (1) Main drivers of the bull market. (2) Worries have evaporated. (3) BOJ upping the ante. (4) QQE-1 was scheduled to terminate by end of FY2014. (5) QQE-2 is more open-ended at least through end of FY2015. (6) Contrary indicator alert: Japanese pension fund raising global equity allocation from 24% to 50%. (7) What if monetary policy can’t cure what’s wrong, but central bankers don’t get it? (8) How do you say “melt-up” in Japanese? (9) Forward earnings weighed down by falling oil prices. (10) Valuation metrics getting pricey again. (11) Central bankers and government pension funds aren’t value buyers. (More for subscribers.)

Congressional Cycle Is Bullish (excerpt)

Of course, one of the most concentrated pools of fools is in Washington, DC. This might explain the extraordinary conclusion of a study examining the performance of the S&P 500 by our long-time statistical consultant Jim Marsten. Along with Joe, he designed many of the publications in the Quant Center on our website. I asked Jim to calculate the three-, six-, and 12-month percentage changes following mid-term elections in the S&P 500. After doing so, Jim concludes:

Suppose I told you there is a technical indicator that, once the buy signal was given, has an amazing record--with the S&P 500 up three months later 17 times out of 18 since 1942, up six months later 18 times out of 18, and up 12 months later 18 times out of 18. The only condition this technical indicator has to meet is a particular political-calendar date, i.e., mid-term election day, which happens to be tomorrow. Buying on that day is one of the best technical strategies I have ever seen. One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results. The historical odds are almost 100% in your favor. The average percentage changes are also good since 1942: 8.5% for the three-month periods, 15.0% for six months, and 15.6% for 12 months.

Why has this mid-term cycle been so consistently bullish since 1942? The most likely explanation is that mid-term elections tend to increase gridlock in Washington, DC. While the debt-ceiling political crises of August 2011 and late 2012 suggested that too much gridlock is bearish for stocks, it has been quite bullish historically. Jim and I believe that it might be again after tomorrow. It would be bullish to see that our Founding Fathers’ system of checks and balances, designed to limit the folly of our foolhardy politicians, is still working.

Today's Morning Briefing: In Praise of Folly. (1) Folly speaks. (2) A famous essay. (3) Central banks get top billing today. (4) Doing more of the same including inflating bubbles. (5) Counterfactual praise. (6) From brief meltdown back to melt-up. (7) Japan: From aw-shucks to shock & awe. (8) Draghi’s low-key shock & awe. (9) Fed policy is also market dependent. (10) Biggest fool may be Pouting Putin. (11) Pool of fools in Washington. (12) Mid-term election rally almost a sure thing? (13) Risk On is back on. (14) “Nightcrawler” (+ +). (More for subscribers.)