S&P's repeat buy-signal
I have to say that I am encouraged by the leadership displayed in this rally by the Nasdaq 100 and FTSE 250 indices. In a genuine move higher, I like to see these indices - which represent technology and mid-cap shares, respectively - at the head of the pack. While the FTSE 250 briefly did enter a downtrend on its swing chart, it has since reversed that by making new highs for the post-June recovery.
Mid-caps push higher
Despite their latest rally, none of the indices is anywhere near becoming overbought on their daily charts. In my eyes, this leaves them further scope to head higher. The Dow has already accomplished the target of 13,000 I mentioned last week, and more besides. I can easily see the Dow, S&P and Nasdaq making new highs above 13339, 1422, and 2763, respectively, in the coming weeks.
Nasdaq's not overbought
Still, while I remain reasonably well disposed towards the stock market right now, I am not hurrying to trade, as of Wednesday 1 August. Both the Federal Reserve and the European Central Bank meet this week. Investors have high hopes that one or both will announce some major new initiative. If they disappoint, an immediate and nasty sell-off will surely ensue. But if one or both obliges, a substantial rally will occur, perhaps over several weeks. Why buy in advance, therefore?
In response to my article on the market's seasonal patterns in August, I had an email asking about the effect of the forthcoming US presidential elections. The US presidential cycle is one of the most famous seasonal patterns of all. Stocks have tended to perform much better in the two years leading into an election than in the two years after an election. The cynical explanation for this is that politicians seek to boost the economy in a bid to secure re-election.
Presidential performances
Since 1900, the Dow Jones has risen around 70 per cent of the time in the final year of the electoral cycle, and by an average of 7.3 per cent. The typical pattern of those gains is shown in the accompanying chart. So far, 2012 is more or less following this template. After a strong start to the year, the market has dipped significantly and then recovered powerfully. The same road map points to another decline followed by a further sharp rally.
Such a sequence of moves would certainly conform to my own personal prejudices about what may happen. Besides the Presidential Cycle, I do see parallels between this year's action and that of the past two years. After the strong declines that occurred in each of those years, the markets swung around before taking off once more from the late summer or early autumn. Still, I am not going to let my imagination run away with me. If the next leg up begins sooner than that, I shall readily join in.
