Media & Marketing

BULLS & BEARS: Market history suggests election lead-up will rock

May 28, 2007

Two weeks ago, I mentioned that there could be a way to profit from now until the big election late next year.

The election is still more than 500 days away, and I already am tired of the sound bites. But if there is a way to make a nickel from the candidates' hot air, the race might be tolerable.

On a recent television appearance, Rich Karlgaard of Forbes said he thought the Dow Jones industrial average could hit 18,000 in the next few years. The Dow at 18,000? Is he crazy?

Historical data suggests he's on to something. Since 1950, each two-year period between the midterm elections and the following general election has hosted a terrific stock market rally.

Between the market's low hit in the year of midterm elections to the high hit in the year of the general election, the bull has charged like clockwork-14 out of 14 times.

The median gain from the low has been 65 percent, and there have even been a couple of runs pushing 200 percent!

The worst sprint was a 40-percent charge, which was the two years encompassing the crash of 1987.

Let's apply these numbers to the current period.

Last year was the midterm election, and the Dow Jones industrials bottomed in June at 10,706. The Dow now is around 13,500, so the bull has already charged 25 percent from the midterm low.

If we can only match the worst gain of 40 percent, that would put the Dow at 15,000 in 2008. The median historical gain of 65 percent would pop the market to 17,600 sometime next year.

Karlgaard's 18,000 doesn't sound so crazy, after all.

As I wrote a couple of weeks ago, a cheap-and-easy way to profit from the remaining run is by using an index-based exchange-traded fund.

You can buy the Dow 30 industrials by buying the Diamonds Trust exchange-traded fund with the ticker symbol of DIA.

The Diamonds trade at 1/10th the value of the index, so they are priced now at about $135. The median historical run would push them up about 40 points.

If you want to turbo-charge the Dow, you could buy the Proshares Ultra Dow 30 with the ticker symbol of DDM.

This ETF moves twice as fast as the market, so the median gain would push it from today's $97 per share to over $150. Yee-haa!

Be forewarned, however, that DDM moves twice as fast in down markets, too.

As Florida condo speculators learned, leverage is great until it isn't. So don't load the wagon with DDM.

Despite all the political rhetoric, if the past repeats itself, the stock market should be kind for a while longer.

If you want to see a chart of all the midterm to general election runs, go to www.sheaffbrock.comand click on the most recent market update.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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