FSU Editorial: "How Far Can the Mid-Term Election Rally Go?" by Hans Wagner 11/27/2006

HOW FAR CAN THE MID-TERM ELECTION RALLY GO?
by Hans Wagner
TradingOnlineMarkets.com
November 27, 2006

The elections are over and every investor is wondering what will happen to the market now. Well, so far the market has been positive. So where might it go from here? Since 1914 the Dow has rallied an average of 50% from its mid-term lows to its mid-term year highs. The smallest rally occurred in 1946 with only a 14.5% gain. The table below shows the percent change in the Dow Jones Industrial Average between the mid-term year low and the mid-term year high for the following year. Keep in mind that 2006 was the mid-term low year and 2007 will be the mid-term high year.

Given this statistical performance, the questions raised are how much have we gained so far and how far might the market go? The table below shows that the DJIA has gained 15.1% since its low of July 16, 2006. So in one sense the DJIA has already surpassed the smallest rally. Since this is still 2006, the market has some more time to go higher, or lower, before we will know for sure.

Next, look at the Date of the High in the table above. Notice that on only three occasions the high occurred in the first half of the year. All the rest of the time the high occurred in July or later. Nine times the high occurred in December of the year after the mid-term election. Certainly raises the probability that the market rally could last for some time.

This begs the question, how high must the DJIA go to achieve a 50% rally? Answer: 16,025, another 3,733 points to go. Now that would be quite a rally.

2006-2007 Mid-Term Election Performance of DJIA
				Low to High
Date Of Low	DJIA	Date of High	DJIA	Gain To Date	% Gain	50% Gain	Points to 50%
7/18/2006	10,683	11/20/2006	12,355	1,672	15.7%	16,025	3,670

So why does the DJIA perform so well after mid-term elections? There is lots of speculation, but no definitive study could be found. One of the best reasons that has been put forward is the two political parties spend much of their time fighting over what laws to pass and end up doing little or nothing. So the market focuses on the fundamentals of the economy rather than what Washington is doing. Another reason might be that the second year following the election (2008) a new Presidential race begins in earnest. All the new proposals put forward to attract voters scare the markets, causing it to fall.

Will history repeat it self once again? There are many fundamental and technical arguments saying we will continue with the bull market. Others say the economy will be in a recession next year and the market will fall precipitously. That is why investing is so hard for many people. The best course to follow is understand the relevant arguments on each side and then stay with the trend in the market. After all the market is always right.

In any case, given this perspective we should be able to look forward to a continuation of the rally we are now experiencing. We will see sell offs, but if history holds true, we should see a higher market in 2007.

As a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market. Feel free to visit the site at http://www.tradingonlinemarkets.com/

CONTACT INFORMATION
Hans Wagner
tradingonlinemarkets.com
Manitou Springs, CO USA
Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.