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A Cup tip for the stock market

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by Peter Switzer

We all know the cliché that bad things come in threes but could good things also come delivered in this way? Apart from the usual plethora of good omens I go searching for to offset the doomsday merchants, there are three market movers on the horizon over the next two weeks.

The first is the mid-term elections in the US on Tuesday 2 November — Cup Day in Aussie parlance. The second is the expected quantitative easing or QE2 due on, you guessed it — Cup Day!

The golden cross

The third and final great omen is the arrival of the golden cross on the charts of technicians who watch 200-day moving averages, trends and many other weird and wonderful wriggly lines.

Gee, wouldn’t that be a wonderful omen tip for the Cup if there was a horse called Golden Cross or maybe colours with a golden cross? But I digress.

A golden cross happens when the 50-day moving average for an index such as the S&P 500 crosses above its 200-day moving average.

It technical terms it happens because share prices are moving quicker in the short-term compared to the average price movement in the long-term. This happened for the Dow Jones early in October.

"Historically, the market has performed better following these patterns than if you were to look at any random one, three or six-month period," Paul Hickey, co-founder of Bespoke Investment Group in the US told CNBC.

The returns

The kinds of six-month returns after a golden cross have been around 3.5 per cent and the strike rate to the positive is around 63 per cent.

Specifically, the average six-month return of the S&P 500 Index following a golden cross was 3.9 per cent from 1929 through 2010, while the S&P 500's average six-month return any other time was 3.1 per cent, according to Bespoke's research. The research also shows the six-month average return following the golden cross is positive 63 per cent of the time but the Nasdaq has an 83 per cent rise rate after a cross. But I like this fact the best — since 1972 the S&P 500 rose 11.9 per cent on average in the year after a golden cross. Other research contradicts this finding but even the critics say it is close to eight per cent, which is pretty damn good.

Look to history

On the mid-term elections, I have pointed out before that the market has gone up significantly 18 out of the past 19 times after the mid-term elections and the market jump has generally been significant.

Finally, there’s also history of the US Federal Reserve increasing the money supply in the second year after an election and that has partly explained why GDP as well as the stock market has spiked in the third year of a US presidency.

Companies report

Of course these are just technical as well as historical reasons to believe in share prices but also US companies have been reporting pretty well. Since 1 October, 74 per cent of companies beat expectations, 26 per cent were below and none came in on market tips. Meanwhile the US Labour Department announced on Friday that unemployment had fallen in 23 states.

Putting the good news and omens together, it wouldn’t be shocking for an American to hear that there’s a precedence for an above average market result after Cup Day. So, you think about that. There could be a Cup tip in this final paragraph!

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, October 25, 2010