A 5% Decline In The S&P 500 Within Three Months Would Be A “Gift”

(This is an excerpt from an article I originally published on Seeking Alpha on August 2, 2012. Click here to read the entire piece.)

A month ago I explained how the three months leading into a U.S. Presidential election featuring an incumbent tend to represent a bullish period (see “The Positive Trade When Incumbent Presidents Run For Re-Election“). While I provided the graphs showing the tempting upside opportunities on the S&P 500 (SPY), I neglected to include the risk of drawdowns. It turns out the the this bullish period also features very mild sell-offs, especially relative to the typical turbulence the stock market faces between August and October.

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Annual Performance of the S&P 500 From July End to October End Since 1950 (including maximum drawdown or loss)

  • average gain: 0.09%
  • median gain: 0.20%
  • average drawdown: -6.37%
  • median drawdown: -4.29%


Annual Performance of the S&P 500 From July End to October End Since 1950 (including maximum loss)
Annual Performance of the S&P 500 From July End to October End Since 1950 (including maximum loss)

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Annual Performance of the S&P 500 From July End to October End During Election Years

  • average gain: 0.11%
  • median gain: 2.02%
  • average drawdown: -5.60%
  • median drawdown: -3.49%


Annual Performance of the S&P 500 From July End to October End During Election Years
Annual Performance of the S&P 500 From July End to October End During Election Years

{snip}

Annual Performance of the S&P 500 From July End to October End During Election Years With A Running Incumbent

  • average gain: 2.69%
  • median gain: 2.59%
  • average drawdown: -2.78%
  • median drawdown: -2.24%


Annual Performance of the S&P 500 From July End to October End During Election Years With A Running Incumbent
Annual Performance of the S&P 500 From July End to October End During Election Years With A Running Incumbent

Source: Dates for elections from wikipedia, prices from Yahoo!Finance

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on August 2, 2012. Click here to read the entire piece.)

Full disclosure: long SDS, long SSO puts

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