Sunday, January 26, 2003
I don't have a scheduled commentary this weekend, but I wanted to touch on
a few things that I think are notable.
President Bush gives his State of the Union address on Tuesday, and what he will say regarding foreign relations is one of the major uncertainties currently overhanging the market. I went back over the past 50 years to see if there was some sort of consistent pattern surrounding Union addresses. The table below details the market reaction for each President, as well as for Democrats and Republicans in general and then for each decade. The S&P 500 was used as a proxy for the market (except for Truman's term, where I used the Dow Jones Industrial Average).
| Day Before | Day Of Speech | Day After | Two Days After | |||||
| President | Return | % Pos | Return | % Pos | Return | % Pos | Return | % Pos |
| Bush Jr. | 0.9% | 50% | (1.8%) | 0% | (0.1%) | 50% | 0.8% | 100% |
| Clinton | (0.2%) | 50% | 0.2% | 50% | (0.2%) | 63% | 0.4% | 75% |
| Bush Sr. | (0.3%) | 0% | 0.2% | 25% | (0.3%) | 25% | 0.5% | 100% |
| Reagan | (0.1%) | 57% | 0.6% | 57% | 0.1% | 57% | 0.6% | 57% |
| Carter | 0.2% | 75% | 0.6% | 75% | (0.2%) | 25% | (0.5%) | 25% |
| Ford | (0.5%) | 33% | 0.4% | 67% | 0.4% | 67% | (0.8%) | 0% |
| Nixon | 0.3% | 60% | 0.6% | 100% | (0.1%) | 40% | (0.7%) | 20% |
| Johnson | 0.0% | 67% | (1.4%) | 50% | 0.4% | 83% | 0.2% | 67% |
| Kennedy | 0.3% | 67% | 0.8% | 100% | 0.0% | 33% | (0.2%) | 33% |
| Eisenhower | (0.3%) | 38% | (0.2%) | 38% | 0.0% | 50% | (0.4%) | 25% |
| Truman | (0.4%) | 25% | 0.3% | 50% | 0.4% | 75% | (0.4%) | 50% |
| Republicans | (0.07%) | 41% | 0.12% | 48% | (0.02%) | 48% | (0.02%) | 45% |
| Democrats | (0.05%) | 52% | (0.04%) | 56% | 0.06% | 60% | 0.01% | 56% |
| 1950's | (0.4%) | 20% | 0.0% | 40% | 0.1% | 60% | (0.3%) | 40% |
| 1960's | 0.1% | 64% | (0.6%) | 55% | 0.2% | 64% | (0.1%) | 45% |
| 1970's | 0.1% | 60% | 0.4% | 70% | 0.0% | 40% | (0.6%) | 20% |
| 1980's | (0.1%) | 50% | 0.5% | 60% | (0.1%) | 50% | 0.3% | 50% |
| 1990's | (0.2%) | 40% | 0.4% | 50% | 0.2% | 60% | 0.2% | 80% |
| Since | 0.4% | 33% | (1.3%) | 0% | (1.0%) | 33% | 1.4% | 100% |
| Total | (0.06%) | 46% | 0.04% | 52% | 0.02% | 54% | (0.01%) | 50% |
Part of these results are going to be influenced by the time of year the speeches were given. The great majority of speeches occurred in January, with a few in the first part of February. This is a seasonally strong time of year, which may give the results a small positive bias. Also, not all addresses were presented in front of Congress, or in front of a television or radio audience, or even presented all at once (some were released in print form in parcels).
From the results, it appears as though the market may be more friendly to Democratic speeches than Republican. In fact, the market was positive at least 8% more during Democratic speeches than Republican ones every day surrounding the speeches. Generally, it appears as though the market has a negative bias on the day before the speech, positive the day of, and neutral thereafter. This probably reflects the fact that most traders (especially institutional) hate uncertainty, and the day before the most important Presidential speech of the year definitely creates some question marks. The last six Presidential terms had a positive average return the day of the speech (excluding our current one, but he has some time left to make up the difference). The last four, even including our current one, had a positive bias two days after the speech, perhaps making up for the lackluster performance the day before the speech was given.
Interestingly, President Bush Jr. seems to be following in his father's footsteps. The market has not acted well in front of Bush speeches (Jr. and Sr.), although we typically make up most of the lost ground by two days afterwards.
Other than those, I don't find a real bias to the data. I'm sure the more politically astute among you can find some similarities between some of the data, and I would be interested in hearing any ideas. Taken in a vacuum, this data would suggest that we might expect general weakness on Monday and Tuesday of this week, followed by market gains later in the week. This is a tenuous conclusion however, so I most certainly wouldn't base trades off of it.
Although I view the VIX in a contrarian manner (meaning high VIX readings are generally bullish for the market), there are exceptions. The major exception is when the VIX makes a huge leap during one day, as it did on Friday. When this is the first spike from a relatively low level and not something that could reasonably be considered an exhaustion move, it puts me on guard for further increases in the VIX (corresponding to a market decline). Since 1986, when the VIX had a one-day increase of around 19% from today's high to yesterday's close (as it did Friday), the VIX went on to increase again the next day 42% of the time, and it was higher three days later nearly 30% of the time. But what concerns me most is that virtually every major panic selloff over the past decade has been preceded by large, multi-day spikes in the VIX. This is the first spike up since the most recent decline began, so there is a distinct possibility that the VIX will keep increasing as market losses mount. So while the increase in the "fear gauge" is somewhat encouraging from a longer-term perspective, it puts me on alert for a possibly sharp move down at any time.
I mentioned on Thursday that I expected at least a little bit more follow-through on Friday. That was obviously completely wrong. When things don't go as expected, that tells me that something more powerful is at play and I think that must be respected. For example, the Rydex RSI spread has essentially been at its minimum value for three days straight now. Previously, it hadn't hit that minimum value even once, so what we're seeing now is unprecedented. This could have two resolutions - either we continue to cascade down in a panic selloff, or we begin to recover and have a violent swing back up as short-term traders who were leaning short begin to cover their positions. Either way, it suggests that a pickup in volatility is likely. From the looks of the sentiment surveys, weekly shorting activity, monthly short interest, put/call ratios, etc. there is certainly no panic evident (granted, some of these measures do not reflect the past week's activity). The buy-the-dip mentality seems to be holding strong, and I just don't believe we are about to embark on a new bull market while that mentality is prevalent. Therefore, I will continue to view any multi-day rallies as shorting opportunities. We have some indications this weekend that perhaps the selling is a bit overdone (e.g. the aforementioned Rydex complex, most of our breadth ratios and the VIX), so I expect to see a spike higher sometime this week. However, at the moment, I don't see a compelling reason to be long on any time frame compared to the risk that would be involved. What would get me looking long is if we continue with the severe selling pressure early next week which shows some evidence of getting "panicky", or if we rally enough to exceed and hold over last Thursday's high. Until then, I will keep focusing on the short side.
- Jason Goepfert
Disclosure: long QQQ puts
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
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