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Crude Oil Topping Creating A Bush-Winning,
But Ultimately Bearish H&S-Right-Shoulder Rally
by Bob Bronson
Bronson Capital Markets Research
October 26, 2004

A brief oil-price-peaking, no-negative-surprise-election-relief rally would be consistent with the recent bond market strength, along with a pause in the sharply declining US dollar.

The latest Barron's Big Money poll included responses from 92 U.S. managers, with varied investment style and portfolio size, 85% of whom expect Bush to win re-election, so they're effectively expecting such a rally.

The rally would also allow the tech-laden NASDAQ to reverse its recent relative strength leadership into market strength consistent with leading a major market sell off following the lower high, H&S right shoulder as further reasoned and illustrated in the first chart below.

The second chart below updates our May 30, 2004 incumbency election comments and chart, which was sent to our private e-mail list 10/25/04:

http://www.financialsense.com/editorials/bronson/2004/0530.html

Because we are in a K-Cycle Winter, or what we fundamentally and technically quantify as a deflationary economic BAAC Supercycle Bear Market Period, the stock market is underperforming this year, which is what we forecasted at year end - despite it being a Presidential election year.

The popular year-to-date stock market performance metric indicates that Bush would not be re-elected since previous winning incumbents - based upon the past 15 elections since 1944 - were associated with stock market gains of 8.5% up to election day. Through Monday, October 25th of this year, the stock market didn't even have a gain, as measured by any of the broad-based capitalization-weighted market averages or the DJIA 30 index.

However, using the methodology of correlating the monthly changes this year an incumbency winning pattern can be seen, which is consistent with the national popularity polls, and especially with dollar-weighted betting - see second chart and associated commentary below. For example, this year's cyclical correlation with the stock market's election-year monthly pattern of the eight winning incumbencies is +32%, as compared to a -7% correlation for the seven losing incumbencies.

More particularly, as illustrated by the light blue dashed line in the chart below, the cyclical correlation is 82% with the stock market performance in 1944, when war-time incumbent Roosevelt defeated Dewey for his fourth term, and in 1996, when Clinton defeated Dole for his second term.

Bottom-line: it's the monthly pattern that the stock market carves out that reflects its call on Presidential elections more than year-to-date gains or losses.

© 2004 Bob Bronson
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Bob Bronson
Bronson Capital Markets Research
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