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(5/5/07)
To start things off this weekend here is a remarkable statistic
going back to the early 1940's. If we look at the yearly returns of
the Dow going back to 1900 there is a remarkable pattern that has occurred since
1943. Every year that has followed a Mid Term Election Year since 1943 has
seen a positive return in the Dow as shown in the table below. The average
return in the Dow during that time for the year following a Mid Term Election
Year has been an amazing 15.7%. However
prior to 1943 you can see there was a mix of up and down years for the Dow
following a Mid Term Election Year. The question is why has the Dow been
up every year since 1943 following a Mid Term Election Year? Is this just
a coincidence or is there a reason why this pattern has continued intact since
World War II? Meanwhile if this pattern continues then 2007 should
end up being a positive year for the Dow and based on what has occurred so far
it appears this pattern may pan out once again.
Yearly Return of the Dow since 1900 following a Mid
Term Election Year
| Year |
Return |
Up/Down |
| 1903 |
-23.6 |
D |
| 1907 |
-37.7 |
D |
| 1911 |
0.2 |
U |
| 1915 |
81.7 |
U |
| 1919 |
30.5 |
U |
| 1923 |
-2.7 |
D |
| 1927 |
27.7 |
U |
| 1931 |
-52.7 |
D |
| 1935 |
38.5 |
U |
| 1939 |
-2.8 |
D |
| 1943 |
13.8 |
U |
| 1947 |
2.2 |
U |
| 1951 |
14.4 |
U |
| 1955 |
20.8 |
U |
| 1959 |
16.4 |
U |
| 1963 |
17 |
U |
| 1967 |
15.2 |
U |
| 1971 |
6.7 |
U |
| 1975 |
38.3 |
U |
| 1979 |
4.2 |
U |
| 1983 |
20.3 |
U |
| 1987 |
2.3 |
U |
| 1991 |
20.3 |
U |
| 1995 |
33.5 |
U |
| 1999 |
25.2 |
U |
| 2003 |
25.3 |
U |
| 2007 |
6.2 |
U |
As far as the major averages nothing has changed as overbought
has become even more overbought. Pullbacks so far have been very minor and only
only lasted a few days. Eventually we are going to see a more
substantial pullback occur at some point as the market rarely if ever moves up
in a straight line. Meanwhile as mentioned last weekend the S&P
500 is now at a level not seen since 2000 when it peaked on March 24 of that
year with a closing high of 1527. 
Furthermore
as we saw in 2006 when the Dow got close to its previous high that occurred in
the early part of 2000 this was followed by a pullback during the months of May
and June (points A to B). Thus it wouldn't be much of a surprise if
the S&P 500 undergoes a similar pullback as well since it's getting close to
its all time closing high. 
Finally another thing that is
occurring with the S&P 500 is that its Relative Strength Index (RSI) has
been trending downward (point C) as it has been making new highs of
late. We also saw the same type of pattern develop in February as
the S&P 500 made new 52 weeks highs but the RSI was trending downward (point
D) which was eventually followed by a sharp 3 week correction in the S&P 500
(points E to F). Of course this doesn't mean a sell off of that
magnitude is
going to occur again however it does mean we could be nearing a pullback which
may last more than just a few days. Meanwhile also notice in the chart below trends
in the RSI can be used to help define a bottom as well. Notice back in
March how the RSI began to trend upward (point G) as the S&P 500 made a
lower low in mid March which was followed by a strong rally. We also saw
the same trend in the early part of 2007 as the RSI was trending upward (point
H) as the S&P 500 was nearing a bottom which was then followed by a rally
from mid January through mid February (points I to E). 
Since 2000 our Long Term Strategy
has had an average yearly return over 50% versus the benchmark S&P 500 which
has had an average yearly return of 2.6%.
| Year |
Average
6 Year
Return |
2006 |
2005 |
2004 |
2003 |
2002 |
2001 |
|
AI Long Strategy
|
58.3% |
+30.0% |
+31.2% |
+68.8% |
+119.3% |
+48.9% |
+51.3% |
| Dow |
3.3% |
+16.3% |
-0.6% |
+3.1% |
+25.3% |
-16.7% |
-7.1% |
| Nasdaq |
2.8% |
+9.5% |
+1.4% |
+8.6% |
+50.0% |
-31.5% |
-21.0% |
| S&P 500 |
2.6% |
+13.6% |
+3.0% |
+9.0% |
+26.4% |
-23.3% |
-13.0% |
Our Long Term Strategy focuses on those stocks with favorable
sales and earnings growth that have developed a a favorable chart pattern such
as the Cup and Handle, Double Bottom and a Flat Base. Click
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