2011 will be the 3rd year of the so-called Presidential Cycle (made up of four years beginning with the year the president is inaugurated), which usually receives a good amount of publicity especially when it triggers a buy signal for the major market indices.

The fundamental reason why it shows an excellent track record might be that the markets usually perform worst in the year immediately following the election (the 1st year of the four-year cycle) as the new president shoulders any negative aspects of administering early in his term (during the 1st and 2nd year) while working to get the economy perked up timely in advance of the election year (during the 3rd and 4th year - the state of the economy on election day is regularly a major determinant).

This will be the first one in a series of postings checking for historical probabilities and odds concerning the 3rd year of the Presidential Cycle, this posting taking a more general view on historical occurrences and periodic returns in comparison to the market's (S&P 500) at-any-time chances for closing out the week/month/quarter/half-year/year on a positive note.

Table I shows the date of the last session of the year ('End-of-Year Day'), the S&P 500′s historical (since 1930) performance ('Annual Returns'), the respective number of sessions (during the year), and the maximum gain and the maximum loss (drawdown) during the year for the 3rd years of all previous Presidential Cycles.

(* no close below trigger day's close during period under review)

There hasn't been a down year in the third year of a presidential term since 1939. In addition, downside potential was regularly limited. Since 1939 (the last 17 occurrences) the S&P 500 closed lower more than -10.00% below the previous end-of-year close at least once during the 3rd year on only 1 occurrence (-10.55% in 1947), but the index gained +10.00% or more at least once during the third year on 15 occurrences (and more than +20.00% on 9) out of the last 17 occurrences.

Table II below shows (and summarizes) the S&P 500's respective periodic returns and a couple of performance metrics (since 1930), broken down into a weekly, monthly, quarterly, semiannual and annual time frames.

It is interesting to note that

• ... although chances for a positive week (Weeks Positive in %) are only slightly better then the S&P 500′s at-any-time chance for a positive week, the median weekly gain of +0.46% significantly surpasses the S&P 500′s at-any-time median gain of +0.28% ;
• ... the longer the period under review, the better the S&P 500′s chances for a positive period are ; during the 3rd year, the S&P 500 closed out a quarter with a gain on more than 2 out of every 3 occurrences, the half-year on more than 3 out of every 4 occurrences and the year on 17 out of the last 20 occurrences (unchanged in 1947), with a median annual return of +18.08% (in comparison to an at-any-time median annual return of +9.66%).

The logical next step is to look for the S&P 500′s historical performance for January of the 3rd year of the Presidential Cycle.

Table III shows the date of the last session of the month ('End-of-Month Day'), the S&P 500′s historical (since 1930) performance ('Monthly Returns'), the respective number of sessions (during the month), and the maximum gain and the maximum loss (drawdown) during January of the 3rd year of previous Presidential Cycles.

(* no close below trigger day's close during period under review)

Although the number of occurrences is limited (naturally), it is at least interesting to note that

• ... the S&P 500 closed out the month with a gain on 17 out of 20 occurrences (or 85.00% of the time), thereof 16 out of the last 17 ;
• ... the S&P 500 posted a median weekly gain of +0.77% (during January) in comparison to an at-any-time median weekly gain of +0.28% (figures not shown in the table) ; and
• ... the S&P 500 posted a median monthly gain of +4.01% in comparison to an at-any-time median monthly gain of +0.87% (figures not shown in the table).

Conclusions

Right at the start of the next year, and in addition to the FED's ongoing (daily) injection of liquidity, the market will get an additional strong tail wind by entering into the 3rd year of the Presidential Cycle.

To be continued ...

Successful trading,

Disclosure: No position in the securities mentioned in thispost at time of writing.