Is There a Political Party That is “Good” for Stocks?

by Martin Goldberg CMT. August 26, 2004

There has been a lot of discussion in the media suggesting that voters will "vote their portfolios" in the November presidential election. The election is on the lips of a bevy of analysts interviewed on the business cable TV and radio channels. Accordingly, I have assembled some key data to see if there actually may be a portfolio-favoring candidate or political party. The table below seems to suggest that if history dating back to the 1960's is considered, contrary to the TV experts, there doesn't seem to be one political party that is particularly better for stocks. Since 1960 there were 5 democratic presidential terms, three that were "good" for stocks and two terms that were "bad" for stocks. In the same time frame there were 6 republican presidential terms, 2 that were good for stocks, and 4 that were bad for stocks. Examine the table and form your own opinion as to whether there is a candidate or party that is "good for stocks".

Year Oath of Office	President Elect	Political Party	DJIA at New Year	Gain or Loss % Subsequent 4 Years	Average Gain (Loss) per year)	"Good for Stocks"?
1961	Kennedy (Johnson)	Democrat	610	42.6	10.7	Yes
1965	Johnson	Democrat	870	9.0	2.2	No
1969	Nixon	Republican	948	8.9	2.2	No
1973	Nixon (Ford)	Republican	1,032	-3.1	-0.8	No
1977	Carter	Democrat	1,000	-2.7	-0.7	No
1981	Reagan	Republican	973	23.2	5.8	No
1985	Reagan	Republican	1,199	78.9	19.7	Yes
1989	Bush I	Republican	2,145	54.3	13.6	Yes
1993	Clinton	Democrat	3,309	97.9	23.7	Yes
1997	Clinton	Democrat	6,442	65.3	16.3	Yes
2001	Bush II	Republican	10,646	-4.4	-1.1	No
Aug-04	?	?	10,182			?

It appears that unless we get a rally into the New Year, the current presidential term has been the worst for the stock market since before 1961.

Was the survey presented above too short term for a meaningful analysis? I decided to take a look back that includes the entire 20th century to the present and examine the performance of the stock market based on the political party in the Oval Office. This data is summarized in the table below.

Party	Presidents	Year Start	Year End	Years in Office	DJIA at End Year	% Gain (Loss)	Average %Gain/Year
			1901		49
Republican	T. Roosevelt, Taft	1901	1913	12	62	26.5	2.2
Democrat	W. Wilson	1913	1921	8	76	22.6	2.8
Republican	Harding, Coolidge, Hoover	1921	1933	12	59	-22.4	-1.9
Democrat	F.D. Roosevelt, Truman	1933	1953	20	292	394.9	19.7
Republican	Eisenhower	1953	1961	8	610	108.9	13.6
Democrat	Kennedy, L. Johnson	1961	1969	8	948	55.4	6.9
Republican	Nixon, Ford	1969	1977	8	1,000	5.5	0.7
Democrat	Carter	1977	1981	4	973	-2.7	-0.7
Republican	Reagan, Bush Sr.	1981	1993	12	3,309	240.1	20.0
Democrat	Clinton	1993	2001	8	10,646	221.7	27.7
Republican	Bush Jr.	2001	2005	4	10,182**	-4.4	-1.1
Totals				104		1046.7	10.1
Republican Summary - 1901 to Present				56		354.7	6.3
Democrat Summary - 1901 to Present				48		691.9	14.4

Republican Summary After 1960				24		241.7	10.1
Democrat Summary After 1960				20		274.4	13.7
* *As of 25 August 2004

Note that in the 56 years when there was a Republican in the presidency, the stock market gained 354 percent whereas in the 48 years when there was a Democrat in the Oval office, the stock market gained 692 percent. Based on the data presented above, it is totally appropriate to view with a healthy dose of skepticism (if not disbelief), the parade of stock market experts on business cable TV suggesting there is a specific party or candidate that is "good" for stocks. In my view, the data does not support such a case. Again, examine the data above, and form your own opinion.

Nasdaq Rally Lacks Conviction in its "Long White Candlesticks"

Once again, when it appeared ready to cave in, the Nasdaq staged a rally that was impressive in terms of magnitude and unimpressive in volume. As of last night, the Nasdaq rallied 6.6% in just 9 trading days, yet it has had a total of zero (0) days where the volume of shares traded has even approached an average days' trading volume. This suggests even less conviction than the last suckers rally!

The most difficult part of this rally is that it becomes increasingly difficult for me to keep from being repetitious and maintaining a fresh and compelling case for evaluating the intermediate term Nasdaq. Fact is that a recent article posted here would suffice in describing the intermediate technical position of the Nasdaq, just add about 3 months and subtract about 100 Nasdaq points. Equally frustrating is the realization that swing trading to the seemingly transparent rhythm of the market would have produced significant gains – both long and short.

The last three significant Nasdaq rallies have produced a key "big white candlestick" day early in the rally. A big white candlestick is a trading day where the Nasdaq opened near its low and closed near its high for the day thereby indicating that the bulls were firmly in control. In all three cases, the gain was over 2% for the day. It is notable and significant that a trend has also developed in the big white candlesticks. These rallies have come with a trend of significantly decreasing volume as illustrated in the chart below.

The long white candlestick analysis is one more of the many pieces of evidence suggesting the Nasdaq is losing bullish momentum. Volume tends to lead price, yet the previous Nasdaq rally extended over 9% without achieving even one day of trading volume that exceeded the average. This time, with the Nasdaq gain a little over 6%, the volume is even more anemic. This suggests that we probably have at most about 3% left in the current rally. This would also correspond to the point where the Nasdaq would whipsaw those who are waiting for an upside break of the 50-day moving average to buy (or cover shorts). So far I see no evidence to suggest the leisurely bumpy ride to Nasdaq 1,650 previously predicted will not occur. The idea that the trader's psychology to "run for the exits" would grip the market when it dropped rapidly from 2,050 in early July to 1,750 in early August did not occur. We'll see what happens when the elevator starts heading down again.

Good Trend Suggests Flight from Less Liquid Speculative Stocks

The stock market has assumed a clear defensive stance even in its preference of large "blue chip" speculative stocks versus the smaller cap, less liquid speculative stocks. I will present some ratio charts that clearly document these trends.

The following is a 3-year daily plot of the ratio of the Nasdaq 100 versus the Enterprise Internet Fund (EIFAX), a fund that from analysis of its past performance, tends to own high beta speculative technology stocks. When the line is heading up, the larger more liquid Nasdaq 100 is outperforming the Internet fund.

Note that in March of 2003, the market had a hunger for high beta stocks. As managers chased performance and were blind to risk, EIFAX handily outperformed the rallying Nasdaq 100. However since April of this year, there has been a relative rush toward the Nasdaq 100. It almost seems as if this is a trend that can be traded from an arbitrage approach buying the Nasdaq 100, and selling short EIFAX.

Here is an annotated 3-year technical chart of EIFAX alone.

As can be seen from the chart, as with the Nasdaq, EIFAX has formed a multiple head-and-shoulders (HAS) pattern. Similar to the Nasdaq, it is approaching its neckline from below. Once the market turns down again, a decisive breaking of the (red) neckline at about 7.4, would suggest a minimum objective of 5 based on the HAS measurement principle.

Of course the EIFAX analysis is for amusement only; however, perhaps there is a way to invest based on the market's clear trend away from smaller, less speculative Nasdaq stocks.

Here is a ratio chart of the Nasdaq 100 to full Nasdaq index.

Given that the Nasdaq 100 as a group of stocks has had its collective "day in the sun," the trend favoring the more defensive Nasdaq 100 is one more piece of evidence indicating that the rally is probably over. Quoting William O'Neil, founder of Investors Business Daily,

"When the forgotten old dogs begin to bark and raise up out of the grave and spearhead the market's advance, the stock market is on its last feeble leg. Watch out."

Today's Market

If there was any action today, it was in the bond market. The 10-Year treasury was up 13/32 (yield 4.27%) in the face of weekly jobless claims that were higher than "economist expectations." Bloomberg radio sited the hurricane in Florida; yet you would figure that the economists had to have known that the hurricane had happened already, wouldn't you? Once again the economic data was that which would boost the bond market. It's uncanny! For ready reference, below is the intermediate term weekly chart of the 10-year note with trendlines. If all goes according to the trends, the US Treasury Note price should touch the downward sloping upper trendline in about November.

"The Light is off" - When they were not talking about oil, the Wall Street buzz focused on Krispy Kreme (KKD), which was down another 10% on news of slowing sales growth and a big miss of Wall Street earnings expectations. The most notable aspect of the Krispy Kreme story that wasn't discussed on TV to my knowledge, is the fact that most of the company was sold by corporate insiders to the public since going public in the second quarter of 2000. As they were selling shares, management's story was all happiness and sweetness with respect to growth projections and meeting or beating Street earnings expectations. The Street upgrades were many, as were management "softball interviews" on cable TV. Now with insiders owning only 9% of the company, the bad news comes out and the expectations suddenly become realistic. Insiders have stopped selling at least 6 months ago (source: Yahoo Finance). Perhaps this was because they knew what news was coming and didn't want to be in a compromising legal position for insider selling like Enron's Ken Lay. Is selling the company's unrealistic growth and profit expectations to Wall Street while selling shares to institutions and the public illegal? It is probably not illegal, as long as it is done in accordance with all appropriate rules and regulations. But it is probably a case of legal trickery. I'm not singling out Krispy Kreme here. Similar stories play out and over again in the stock market, and I predict there will be similar days for many other companies, especially those whose business is "the other donut" technology. Oh, an analyst in Barron's was quoted last week as saying that the growth story in Krispy Kreme was still alive. This tout was worth about a 15% gain in Krispy Kreme share as speculators bid up the shares before the company "came clean" today. "Let the buyer beware."

The Dow, S&P, and Nasdaq were little changed on volume that may have been one of the slowest this year. In my view, with the Nasdaq at about 1850, this is tremendous selling opportunity for those with a mind toward the long-term. Short-term traders and technicians would suggest waiting for at least the first ugly red candlestick before selling. And this has merit because in an environment such as this, there is no reason to believe that the current up trend will not run for a while. To get a better perspective of the Nasdaq's technical condition, below is an annotated Nasdaq Combined-Computer Index chart.

The intermediate trend is down, and this is a sucker's rally. I rest my case.

Gold ($410) and the dollar were little changed, while silver was up $0.07 ($6.68). The HUI and the XAU were each down about 1%. Oil was down today (but I'm sure you already heard!).

I'll be on vacation next week, and back the week after that. Have a good one.

Martin Goldberg

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