by Dave Evans of binary.com
Obama’s Third Term Could Be a Time To Buy
This week the Democrats lost control of the US senate, leading many commentators to state that Obama has become a lame duck president. Regardless of Obama’s ability to push through his reforms, the third year of his presidential could still exert a positive influence over US stock markets.
Data analysed by www.cxoadvisory.com/ shows that the third year of the Presidential cycle has historically been by far the strongest since 1950, with the first two years historically the weakest:
Presidential Cycle Performance: CXO Advisory
Not only is the third year of the cycle the most profitable, it is also the period offering the least volatility as defined by the lower range of variability.
Presidential Cycles and Standard Returns: CXO Advisory
Indeed, as the scatter plot above shows, the third year of the cycle has been highly consistent with just one negative instance, compared to the poor performance of the first two years.
This alone is a powerful statistic, but we are also entering a highly positive period of seasonality known as the Halloween indicator. The period between November and April is one of the best historically for stock markets, with November in particular a strong month.
Combining the third year of a Presidential Cycle and the seasonal effect of a strong stock market in winter, we could be entering a very strong period for stock markets, despite the sky high valuations at the moment.
Putting these factors together, quantifiableedges.com/ found that the average gain between November and April in the third year of the Presidential cycle is upwards of 16.5%, with a draw down of just 3.3% on average. There were some very difficult drawn downs in this period, but the beauty of binary trading is that these do not matter as long as the closing value is where we targeted.
A good way to play this is a HIGHER trade predicting that the S&P 500 will rise and close above 2,200 in 174 days time for a potential return of 439% if successful. Or put another way, betting that the S&P 500 will be above 2200 on April 30th could return £53.90 for every £10 staked.
Euro heading for more falls
The chart below shows the current levels of correlation between the S&P 500 stock market and the main currency trends.
The current cycle implies a strong positive correlation between the dollar index (the blue line) & the USD/ JPY (the red line) compared the S&P 500. At the same time there is a strong negative correlation between the EUR/ USD and the S&P 500. The upshot is that we have been seeing the dollar index rise in step with the S&P 500, with the USD/ JPY following suit. The reason for this is that as the economic situation in the US improves, the prospect of a rate hike increases, thus lifting the value of the dollar and stock markets. The dollar and then yen have a times both been used as safe haven assets, but right now it’s the yen which is more likely to rise on bad news and drop on good news.
The EUR/ USD’s movements are tied to this trend as a strong dollar will inevitably weaken the pair. While the dollar has been strong, the euro has been weak, but this weakness for now has not impacted on the performance of the stock market. Indeed the opposite has been true, with the ECB’s move towards quantitative easing causing the euro to diminish, while bolstering the performance of European and US stock markets.
This week, the ECB moved closer towards implementing and perhaps expanding its proposed quantitative easing activities. Arguably, ECB president Draghi said nothing new in his press conference on Thursday, but markets seemed to lap it up all the same, especially the implication that ECB staff are exploring ‘extra measures’
The upshot is that further easing activities, or at least the expectations of them will have a dilutive effect on the euro. In addition, given the euro’s negative correlation with the S&P 500 and the fact that we are entering a strong period for the market, we could actually see further losses for the EUR/ USD while the stock market travels higher.
A good way to play this is a LOWER trade on the EUR/ USD, predicting that the pair will close below 1.2300 in 35 days time for a potential return of 199%. Or put another way, betting that the EUR/ USD will close below 1.2300 on December 12th could return £29.90 from every £10 put at risk.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.