Market Shakes Off Worst-Case Eighth Year Scenario
By: Christopher Mistal
August 09, 2016
At the close of trading yesterday, DJIA was up 6.3% year-to-date. S&P 500 was up a similar 6.7% and NASDAQ was up 4.1%. At these levels of performance DJIA and S&P 500 are slightly above average compared to past election years while NASDAQ is roughly in line with historical averages for this time of the year. Barring some disastrous exogenous event, the worst-case Eighth Year of Presidential terms scenario appears to be off the table.
[DJIA 8th Year Chart]
[S&P 500 8th Year Chart]
[NASDAQ 8th Year Chart]
Now that the 8th Year scenario is highly unlikely let’s turn attention towards the more likely typical election year pattern for the remainder of the year. Although August is typically a weak month, this is not the case in election years. Since 1952, DJIA and S&P 500 have averaged gains of 0.8% and 1.0% respectively in election-year Augusts. NASDAQ is even stronger, up 2.9% on average since 1972. However, once August ends and September arrives, back-to-school and back-to-work time, weakness does creep back into the picture. 
Looking at the above three charts, an interim top is seen at the beginning of September for DJIA and S&P 500. NASDAQ strength tends to last slightly longer, until about mid-month September. Weakness then tends to persist until early- or mid-October before the market rebounds to close out the year on a positive note.
Some Room Left
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
The rally off of the Brexit lows has been impressive, but the nearly 20% across-the-board rise off of February’s lows is even more so. DJIA and S&P 500 closed out July with down to flat performance while NASDAQ simply charged higher into August. As a result, stochastic, relative strength and MACD indicators applied to NASDAQ are stretched. The same indicators on DJIA and S&P 500 charts are mixed. MACD is negative, but stochastic and relative strength are positive.
All three indices still have some room left to run before reaching projected monthly resistance levels (red dashed lines). DJIA could run until about 18800, S&P 500 2210 and NASDAQ 5300. Respective 50-day moving averages (magenta solid line) would be the first area of support on any pullback or weakness. For DJIA and S&P 500, their 50-day moving averages are right around last year’s old all-time highs.
Assuming the market does get derailed, either by economic data or by an unexpected event, the balance of 2016 could be relatively smooth sailing. The incumbent party in the presidential election has a solid lead in the polls, see page 28 of Stock Trader’s Almanac 2016 (STA16) which suggests gains from now until yearend. The last seven or eight months of election years since 1952 have been positive except in 1956, 2000 and 2008 (page 32 of STA16). And even the Worst Six Months in election years can be less challenging as detailed on page 62 of STA16.
This does not mean that buying now, at or near all-time highs, is the best move. The seasonal pattern charts back at the beginning suggests a better buying opportunity will be available sometime in September or October. This is further supported by the market performance following a Hot July.