Three Reasons Why this Rally May Have Legs

The human mind often requires an explanation for stock market behavior. It will invent casual relationships where they do not exist. The mental tendency is something to be mindful of and is the primary reason that concentration always should be focused on price action, rather than on speculating about what might or might not be the cause for the behavior. - Charles Kirkpatrick, Julie Dahlquist.

As such let’s focus on Three reasons this market may have legs.

1. Seasonality:

Each year several patterns or trends tend to repeat in stocks. We see a spring rise, late second quarter decline, summer rally, and fall decline. The year-end tends to have a rally that extends into January and stocks that are bought in October have a higher probability of appreciating if held for a 3 or 6-month period. - Martin Pring. 

2. Election Year Pattern:

 Yale Hirsh, the editor of the stock traders almanac (www.stocktradersalmanac.com) has compiled statistics on a four-year cycle that many call the Presidential Election  Cycle and broken it down into characteristics that have occurred each year for the periods that a President is in office. Since 1832 the market has risen 557% percent during the last two years of an administration which averages 13.6 % per year for the last two years. Hirsh’s presumption was that the incumbent party wants to appear in a favorable light during the last two years and especially the last year to be reelected. To do this, aside from providing the standard spin” about their accomplishments, they force interest rates lower and stimulate the economy. -  Charles Kirkpatrick, Julie Dahlquist.

3. Interest Rates:

Although interest rates have remained low if we look at what Hirsch said, perhaps if the Fed would have raised the interest rates, and although they haven’t raised and may not raise this year, they continue dangling the possibility of increasing as a possible Dem “spin” demonstrating how much good they’ve done for US economy. Or Perhaps they don’t want to seem inconsistent in their messages- Albeit it's a little late for that.

The reality is that, for now, it doesn’t matter. As a technician, I react and predict from what I see on the charts. If interest rates remain low, perhaps the economy continues to sizzle – if that’s what really is happening. If interest rates go higher, studies have shown that rising rates are not as important than the “rate” at which they rise.

The markets are reacting too hastily to commentary rather than actuality, so my suggestion is to get interests rates out of your minds for the time being and get back to simple statistics. Charles Dow is quoted as saying, “Pride of opinion has been responsible for the downfall of more men on Wall Street than any other factor.”  As such it may be wiser to look for returns by basing investment decisions on more rationally behaving evidentiary indicators.

Statistics show there may be more upside in the 4th quarter and if you hang on too tight to belief’s that don’t really have a lasting effect on the markets, you just might miss that upside.

In summary:

Election years tend to be good for the markets.

The period from November to January historically is the strongest time of year for stock.

Stocks bought in October tend to have a higher probability of increasing in value if held for a 3 or 6-month period.

Look for good entry points, use stop losses, don’t put more into one company or sector than your portfolio can handle if your wrong.

Sources :

Kirkpatrick, Charles D., and Julie R. Dahlquist. Technical Analysis: the Complete Resource for Financial Market Technicians. Upper Saddle River, NJ, FT Press, 2011.

Pring, Martin J. Technical Analysis Explained: the Successful Investor's Guide to Spotting Investment Trends and Turning Points.

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