The S&P 500, represented by the SPY, has generally stayed above the 200-week moving average long-term. It is a good line in the sand to use as a guide for potential market crashes. Bear market declines are primarily responsible for the few occasions when the SPY dipped to or below the 200-WMA — most notably in 2001, 2009, and 2020. Due to the devaluation of US debt, the SPY also temporarily breached the 200-WMA in 2011.
The adage "Don't fight the Fed" was repeated by Mish recently to remind our team that the Fed is aggressively tightening into a slowing economy, with high inflation and a tight labor market. The stock market is on a collision course, but, based on past seasonal trends since 1946, we might not want to "Fight the mid-term elections."
The seasonal pattern of stock prices during mid-term election years points to an anticipated pattern; what will the SPY's 200-week moving average tell us about the likelihood of more market falls and the plausibility of the normal mid-term election stock market pattern materializing in the coming weeks?
During mid-term election years since 1946, there is bias to the downside from mid-October to early November, but a strong rebound is generally seen. The chart above, "S&P 500 Midterm Election Year Seasonal Pattern Since 1946," points to lower stock prices in mid to late October, with a rebound in November lasting through the end of the year. Please note the red line above represents the 2nd Year of a New Democrat elected President.
Historical seasonal patterns since 1946 around mid-term elections point in a particular direction, but that does not mean this year will follow the past seasonal direction. With the market in such a bearish mode, it may be hard to have confidence in this bullish seasonal pattern established since 1946. Will this year deviate from the mid-term election seasonal pattern?
For specific confirmation and signaling, we will look at the 200-weekly moving average in the SPY, XRT, IYT and IWM and keep our subscribers closely informed.
The SPY and Mish's Modern Family could signal an increased sell-off in the upcoming days and, equally, alert us to a potential seasonal trend change in the weeks ahead, which could lead to a profitable 4th quarter for those prepared.
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