But Which Trend, Is Your Friend?
I've always been told and believed that timing the market daily is a mug's game. I mean that going bug-eyed watching a trading screen all day in hopes of scalping an extra fraction of a point here or there is fine for some; but for most of us doing something else for a living, trying to flip stocks daily in the hopes of consistently outperforming the market has proven to be a total waste of time. In fact, it's usually detrimental to long-term returns compared to a simple Buy-&-Hold investment strategy.
This doesn't mean hold-forever; I'm just not a big believer in short-term Day Trading. But I do believe that intermediate to long-term Trend Trading can be very useful in timing better entry and exit points - because it takes more than a few days momentum data to confirm a meaningful trend.
My favourite momentum data comes from established market cycles. They repeat often and therefore tend to be more reliable. However I'm not talking about the Super-Bowl Market Predictor that says that an old NFL-team win means rising stocks, while an old AFL-team win means falling stocks. Yes I know it's been around a long time, with an impressive 80% accuracy, but there still needs to be some common sense reasons why a trend worked, before betting your savings on it repeating.
Market Timing Around The 4-Year Presidential Election Cycle
One of the most important market trends to consider has been the Four-Year Presidential Election Cycle. You too may have known about this for years, but I'll guess that after looking closer that you had no idea just how predictable and powerful this market indicator is. I didn't, but will from now on!
History suggests that during the first two-years of a presidential term, that the market underperforms compared to the last two-years. The first year is usually the worst, and the second year is also below average. Wars, recessions and bear markets tend to start or occur in the first-half of a term. The third year is usually the strongest and the fourth year, an election year, also tends to be above average.
S&P 500 Total Return Index - 1948-2008 average by U.S. Presidential Term-Year:
In 1936 Keynesian Macroeconomics introduced the need for governments to use these spending taps. This theory called for governments to ease business cycle recessions by stimulating demand through fiscal policy. A decade or so later the idea became government gospel, especially as a political tool to influence the timing of when the economy (and voter enthusiasm) would be inflated.
Although the Federal Reserve is supposed to be independent of the president and Congress, monetary policy appears to follow the presidential election cycle. Monetary policy expanded 65% of the time during the third year, compared to 48% for the other years. Does it still seem like a coincidence why the third year of a president's term is usually the market's best year?
Huge Second-Half Gains Versus First-Half Losses
There are many similar tables and graphs that demonstrate market returns for each year of any four-year presidential term. However it is not as meaningful to look at election years prior to 1952, because other than for WW2 the government generally did not attempt to influence the economy before then. When analysing market performance the S&P 500 (SPDR ETF (NYSE: SPY)) is the benchmark, excluding commissions, dividends, interest, and of course taxes, that are not factored in for simplicity.
The best investment returns were not surprisingly provided by the 27-month period from October 1 of year-2 until the end of a presidential election year. This is compared to the 21-months starting on the first trading day of the inaugural month until September 30 of year-2. What did surprise me is the consistency and magnitude of how far these grouped cumulative returns were apart!
Starting with the 1952 election year, $1,000 reinvested only during the first-half of every presidential term would have returned a measly $643 in the year 2002, a loss of 36% after 50-years - not including inflation! If you had instead invested only during the second-half of every presidential term this would have returned $72,701, a gain of 7,170%. Wow!
Further, second-half'ers won during all thirteen terms from +16% to +70%, and averaging around 40%. First-half'ers won seven times from +7% to +49%, but lost six times from -2% to -47%.
The problem is that these tables only go up to the year 2000. A lot has happened since then including 9/11 and the so-called Great Recession from December 2007 to June 2009. I'd like to also know how well this trend predictor held up under these extreme conditions. Using our website's Historical tab after quoting the symbol ^SP500 allows me to calculate returns for the 2004 and 2008 election years.
My chart below plots all of this data for the 1952-2008 presidential election years. It appears that the second-half predictor held up well after 9/11, as the S&P 500 gained around 48% from October 1, 2002 until December 31, 2004. However almost all of this gain was given back during Bush's last term ending in 2008, marking the first second-half loss of any presidential term in over six decades.
The first-halves were up around +10% and +26% for the 2004 and 2008 election years. Not bad until you realize that the 1952-2010 first-half terms cumulative value is still under the initial $1,000.
Stock Markets Predict Presidents And (DO NOT) Do Better Under Republicans
This predictor may even work in reverse, as many believe that the stock market's social mood can predict who wins the next election. The incumbent usually wins if the market is strong and the other party usually wins if the market is weak, going into an election.
Contrary to popular belief, research studies of market data from 1927-2003 show that excess returns for Democratic presidents have been about 11%, while only 2% for Republican presidents. For small-cap stocks this is more pronounced, with a difference of excess returns of about 22% for Democrats compared to Republican administrations. Market volatility for Democrats has even been lower.
This year being another presidential election year, we won't know Obama's second-half return until December 31. However, the S&P 500 was 1,143 on October 1, 2010 and if we apply today's 1,461, this works out to around +28%. Unless there's a crash this month (always a scary thing to say in October) then the stock market may be predicting an Obama win.
Precious Metals Rallying
We often refer to ratios such as the Gold / Silver, Gold / Oil and Dow / Gold ratios. Investments like these compete for investor attention, and knowing their historic ratio averages, and upper and lower ranges, help identify when one might be cheap or expensive overall, and its relative value. Last month's newsletter showed gold's 10-year uptrend, with corrections in 2006, 2008 and 2011, and how metals were seasonally poised to rally again, with the gold/silver ratio indicating that silver was relatively cheap. Gold is now higher... and silver has materially outperformed it!
Gold and silver's biggest ETFs are SPDR Gold Trust (NYSE: GLD) and iShares Silver Trust (NYSE: SLV). Global X's related ETFs include: Pure Gold Miners (NYSE: GGGG), Gold Explorers (NYSE: GLDX), Silver Miners (NYSE: SIL) and a new diversified Junior Miners ETF (NYSE: JUNR).
Now that gold's decade long uptrend appears to be intact and may be gaining strength again, we might be able to extend gold's established trend lines to suggest its next major technical resistance. This assumes that gold's corrective phase that started last fall has concluded, and that gold can smash through its previous high resistance of $1,923 this time. Looking out a year or so, based on these highly conditional technical observations alone, I come up with around $2,650 an ounce for gold.
If this happens then silver works out to $52 if the gold/silver ratio remains where it is now, at 51. However, if the gold/silver ratio drops back to its historic level of 15 at that time, like it did as gold and silver's last major uptrend peaked in 1980, this might suggest around $175 an ounce for silver.
Base Metals Rallying
Since our last two newsletters about bottom fishing gold and other metals and related stocks, most base metals have kept pace with precious metals. Since August 7, the approximate spot price increases were: Gold and Palladium +10%, Platinum +20%, Silver +24%. For base metals: Copper +10%, Zinc and Aluminum +12%, Lead and Nickel +20%.
There are lots of supply and demand reasons, based on monetary versus industrial or other uses, why precious metals and base metals prices shouldn't necessarily run together. In any event, once again gold's established trickle-down trend effect on base metals has held.
Spot Uranium, The Outlier
One metals train that has stubbornly refused to leave the station is the short-term U3O8 price. Stuck at around $50 a pound for a year now, uranium peaked back in 2007 at $137. Back then uranium prices, and similarly record high oil prices, were technically extended and due for a major correction. Oil has since recovered to more than double its lows, while uranium and related investments suffered further and has yet to recover after Japan's record earthquake and tsunami on March 11, 2011.
Investors near abandonment of anything uranium was blamed on the Fukushima-Daiichi nuclear accident. The media hyped nuclear fear, and governments worldwide reacted. Most have reasonably mandated reactor stress-tests and review, while Japan and a few others like Germany didn't wait for the facts before rashly stating they would end their use of nuclear reactors altogether.
The fact is that the March 11, 2001 Japanese earthquake and tsunami was a natural disaster. Over 16,000 people were killed and 3,000 more are missing. However, a year and half later not one of those deaths are attributed to nuclear radiation.
Another fact is the same earthquake caused a hydroelectric dam to collapse in the same Fukushima district. This resulted in hundreds of deaths and thousands of homes being destroyed. I don't recall any media reports, government statements or public outcry for ending hydroelectric power!
Despite these facts, the U3O8 spot price is now $45.75. It was close to $70 just before Fukushima.
Long-Term Uranium Demand, Supply and Prices Remain Supportive
We have been writing for months about positive fundamental developments in the nuclear power industry. China is the main driver for new nuclear power reactors and is now going ahead on projects that were put on hold after Fukushima. Next in the pecking order for the world's 552 reactors currently in construction, planned or proposed are: India, Russia, United States, Japan, United Arab Emirates, Ukraine, United Kingdom, Vietnam, Canada, South Korea and others.
Not only are these nuclear power programs still going ahead, we have recently cited industry experts and major publications that say many of these countries are now accelerating their nuclear energy efforts. Facing looming power shortages and higher energy costs going into elections over the next year, politicians in Japan and Germany have been back-pedalling on their anti-nuclear positions. Reactor closings may get delayed in Germany, and two reactors are now back online in Japan, with construction now resuming at J-Power's Ohma nuclear power plant, announced October 1.
On September 19 Japan's government retreated from recommendations calling for the elimination of nuclear power by 2040. The New York Times and Kyodo News implied that by dropping this goal, the Japanese government appears less committed to a nuclear phase out. Japan's dependence on imported energy and rising energy costs are unsustainable and many now believe the 35 "safe" idled nuclear power plants will be allowed to restart after the 2013 election.
Weak short-term prices have caused uranium-mining projects, like BHP Billiton's (NYSE: BHP) huge Olympic Dam mine in Australia to be deferred last month. This worsens a supply deficit that the world already has, not including the effects from all the positive demand factors reported recently.
Another major reduction in world uranium supply should happen as the U.S. and Russia complete their 20-year Highly Enriched Uranium (HEU) Program, scheduled to end next year. Also referred to as Megatons to Megawatts, or Swords to Ploughshares, uranium from nuclear warheads is converted for peaceful uses such as nuclear power. By the end of 2013, 500-tons of HEU will have been down-blended. Going forward, this removes about 13% of the world's annual uranium supply.
Raymond James, Morgan Stanley and others seem to agree, forecasting a uranium shortfall after next year, with spot prices around $70. Currently the 24-month or later U3O8 price is around $60.
U3O8 is radioactive and highly regulated, and therefore can't be held like bullion. Uranium also does not have a fully transparent active market, as utilities and uranium producers usually don't announce transaction prices or even the name of the buyer.
To ride the next uranium trend investors have to look at ETFs like Global X Uranium (NYSE: URA), or at specific uranium mining stocks. These include major producers like Cameco (NYSE: CCJ)(TSX: CCO) and Rio Tinto (NYSE: RIO). Our featured uranium stock continues to be Uranerz Energy (AMEX: URZ)(TSX: URZ), a $129-million market-cap company actively exploring, developing and expected to soon be producing uranium in Wyoming's Powder River Basin (PRB).
You have to credit Uranerz' management, or at least their good luck. Just before Fukushima, when URZ traded around $5 a share, they raised $47-million for mine construction and related costs. URZ then sold-off like everything else uranium in 2011/2012, but the fortunate timing of that funding provided much less share dilution compared to today with URZ now trading at around $1.67 a share. This summer URZ remained one of only two uranium small-caps in the Russell Indexes.
Uranerz keeps advancing its projects while many other uranium companies have had to slow down and re-evaluate. The Nichols Ranch plant at the company's first uranium mine is near complete and just waiting for the company's Deep Disposal Well (DDW) permit before hopefully setting a production date soon. URZ is also exploring its 30+ uranium projects in the PRB, with over 200 wells drilled so far this year, including a new uranium trend they just discovered called the Monument Project. URZ remains very well positioned for when uranium prices start to run again!
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