Seasonal Strategies

Market Outlook November 2018: Midterm Time Is Bullish

For the past several months we have often heard investors and commentators saying, “Sell in May did not work this year and it hasn’t worked for the past several years” or “Sell in May is dead.” Not true. Everyone forgot about October. We always are leery of October.

The recent spell of 2-3% daily market moves has many concerned that this could turn into something more sinister or bearish. That is always a concern and still possible, but it does not appear to be highly likely at this time. Current market action is less tame than it has been over the past several months and years, but the quantity and magnitude of these larger daily moves is minor and not indicative of a deeper downdraft.

We looked back to 1997 and found that mild clusters of 2-3% daily market moves like the current one have occurred around mild corrections, as we had from late January to early April 2018, and “mini-bears” like we had from August 2015 to February 2016. What is going on right now does not compare with the more alarming rate of big daily moves at more negative market junctures.

This is October, this is normal. CBOE Volatility Index (VIX) is still relatively calm. Sentiment has come off its high horse and fundamentals remain supportive. Yes we are having some rather typical midterm election politicking and there are some geopolitical, diplomatic and trade concerns, but from our historical vantage point and current analysis our outlook remains positive for the next several months.

Expect some more churning and selling and rallying over the next several days and weeks as the market finds support and wait patiently for technical confirmation before allocating fresh capital to the long side or coming off the sidelines and getting less defensive as we have been for several months.

Meanwhile, midterm election bombast and backbiting have kicked into high gear and speculation is rampant on both sides of the aisle about who is going to control congress, especially the House of Representatives. It is considered a bit of a coup for a sitting President to have a small loss or gain of House seats.

Pages 32 and 100 of the Stock Trader’s Almanac 2018 details how prosperity is more important than peace to the outcome of the midterm elections and how bullish the days surrounding the midterm elections have been. Many have been concerned that the market will be in trouble if President Trump and the Republican Party lose The House. We have crunched the numbers further and found this has not been the case in the past.

Since the passage of the 20th “Lame Duck” Amendment to the Constitution in 1933, which moved the beginning of terms for newly elected members of Congress in the midterms to January 3 right after the election instead of the following December, 13 months later, there have been 5 instances when the sitting President lost control of The House.

As you can see in the table here, it did not have a major negative impact on the market; in fact the market has performed more positively in the past after The House flips from the president’s party to the opposition in the midterms.

Historical House Seats Lost During Midterms Table

This selloff may actually make the “Sweet Spot” of the 4-Year Cycle (October 2018 to June 2019) even sweeter. The overbought condition of the market has clearly been remedied. Overarching economic and corporate fundamentals remain solid despite tariff worries and tech weakness. Complacent bullish sentiment has retreated. The Best Months of the year are about to begin in the Sweet Spot of the 4-Year Cycle. An attractive buying opportunity looms large.