FOUR-YEAR CYCLE BOTTOM WAS COMPLETED EARLY THIS YEAR AND FAVORS STOCKS -- BUT WATCH OUT FOR SHORT-TERM SETBACK AS STOCKS TEST APRIL HIGHS
MIDTERM ELECTIONS ARE GOOD FOR STOCKS... One of the reasons that I started turning more positive on stocks over the summer was the fact that the four-year cycle was due to bottom this year. That and a positive turn in technical and intermarket trends. My September 2 message carried the headline "With Four-Year Cycle Bottom Due in Second Half of Year, It Might Not Be Too Soon to Start Reallocating Some Funds Out of Bonds and Into Stocks". The first paragraph of that message pointed out that while the cycle bottom usually occurred during October, I believed this year's bottom would occur sooner. The main reason for that more optimistic view was the presence of so many head and shoulders patterns visible on stock charts. That H&S bottom was completed during September when most stock indexes broke through their August highs. Positive intermarket factors were a weaker dollar which gave a big boost to stocks in general, especially those tied to commodities and foreign stocks. Low bond yields gave a big boost to dividend paying stocks. Expectations for a second round of quantitative easing kept most bond categories in uptrends and contributed to the weaker dollar. Those trends were evident again today. The dollar fell which boosted stocks and commodities. Bond prices rose as well. Investors appear optimistic that a big Republican victory will make things better. In addition, tomorrow's Fed meeting is expected to announce more quantitative easing. The most important technical factor at the moment is the fact that several major US stock indexes are challenging their April highs. As I wrote last week, I believe that the spring highs will eventually be broken. My concern at the moment is that everyone has been buying on expected electoral results today and Fed action tomorrow. That being the case, there's the possibility of a "buy the rumor, sell the fact" scenario. In other words, I'm nervous that stocks could be vulnerable to a short-term setback on any hint of disappointment. With that short-term caveat, I continue to believe that the four-year cycle bottom has been completed which argues for a stronger stock market. I also continue to believe that most investors hold too many bonds and not enough stocks. The next couple of days should be especially interesting.
