4 Year Presidential Cycle

This is the first of 4 charts I plan on revealing this week. Each one will hopefully shed some insight into what we may expect in 2006.

This chart shows what is known as the 4 year or Presidential Cycle. The theory behind this is that U.S. markets have a tendency to make a high in the 4 year, and a low in the 2nd year of a president’s term. It has held up quite well historically, with the notable omission of 1986 (Recall, however, what happened in 1987).

click for larger graphic

The chart suggests that a cyclicality is at play in direct contradiction to the random walk thesis. Given the upward bias of markets over time, regular corrections may be inevitable. What is truly astonishing is the very human tendency to downplay or even ignore these periodic dislocations.

This is not unlike yesterday’s discussion of earthquakes, volcanoes and tsunamis.

>

I pulled this from my files, but unfortunately, I cannot find a source. It looks similar to work by Investech’s Jim Stack; I emailed them to confirm this.  If anyone has any insight into where this may have come from, please let me know . . .

UPDATE 1:   December 27, 2005  11:03am

William Hester has several excellent charts on the subject here:

Average Gain in Year Two of Presidential Cycle Hides Important Declines

http://www.hussmanfunds.com/rsi/prescycle.htm

>

UPDATE 2:   December 27, 2005  5:03pm

James points us to BTR Capital Management (PDF) and this chart, which looks remarkably similar:

click for larger chart

and, it looks better in red!

Category: Markets, Technical Analysis

Inverted Yield Curve: Its different this time (not)

Category: Federal Reserve, Fixed Income/Interest Rates, Inflation, Technical Analysis

The Top 25 WSJ Online Articles of 2005

Category: Financial Press, Weblogs

How Blind Are We to Our Own Shortcomings?

Category: Apprenticed Investor, Psychology

Holiday Weekend Linkfest!

Category: Weblogs

Stuff Doesn’t Make You Happy . . .

Category: Psychology

Federal Reserve Chairman George Costanza

Category: Federal Reserve

Barron’s: Investigate a possible impeachable offense

Category: Politics

The “breathtaking inanity” of Intelligent Design

Category: Science

Amazon Free MP3 Downloads

Category: Music