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The vaunted U.S. presidential election cycle has been one of the best investment formulas going.

Right now, it's flashing a screaming "buy" signal, suggesting that stock markets are going to have the wind to their backs both next year and into 2012, with outsized gains likely.

Investing by the presidential cycle is based on the long-running observation that the U.S. stock market has repetitive movements during the terms of the U.S. commander-in-chief. Like clockwork, shares usually fall or drift during the first half of a president's term, and then when the chimes hit the halfway point, they have strong rallies.

The effect is so regular that it's gained a cult status and enthralled many technical analysts. It's also spawned academic studies - always a sign that something has been happening frequently enough to be noteworthy.

"I think it's a signal you can't ignore," contends Bill Carrigan, founder of gettingtechnical.com, a market advisory service based in Oakville, Ont.

Many investors are looking at the cycle now because the U.S. mid-term vote, scheduled for next week, marks the near-halfway point in the presidential term, the line in time separating the period of lacklustre returns from those that are stellar.

The evidence supporting a presidential cycle is strong - as demonstrated in markets during most of the last 10 administrations. It's been present during the "greater part" of presidencies from January, 1965, to December, 2003, according to a research paper published last year co-authored by Wing-Keung Wong, a professor in the economics department at Hong Kong Baptist University and published last year.

He concluded that the existence of the cycle "may constitute an anomaly in the U.S. stock market, which could be useful to investors."

Mr. Carrigan says the general effect has been at work even longer, based on data from the Stock Trader's Almanac. Records going back to 1833 show that in the third year of a presidential term, shares rally an average of 10.5 per cent. Markets increased in 33 years over the period, and fell in 11. During election years - the fourth year of the cycle - shares rallied an average of 5.8 per cent, with increases 29 times and declines in 15.

"It's a pretty good batting average," Mr. Carrigan says of the effect.



More than just a coincidence

There is a reason shares might show this repetitive pattern. Most presidents want to get politically difficult tasks, such as budget hacking or tax increases, done in the first two years of their administrations, leaving the last two years for expansionary economic polices designed to help re-election bids.

Another positive take on the election cycle was issued last month by Eric Bjorgen, senior analyst at The Leuthold Group, a Minneapolis-based investment management firm. Mr. Bjorgen noted that outsized gains seem to come just after the U.S. mid-term elections.

In a report to clients, he said that the mid-terms "historically kick off a strong uptrend for stocks." He found that since 1942, the market has never declined in the 200 days following a mid-term vote and the average gain over the period has been a more-than-respectable 18 per cent.

One factor that could undermine the link between the U.S. election cycle and a booming market is that emerging countries are becoming much more important in determining global economic growth, possibly diluting the impact of any moves by U.S. administrations to prime the pump.

But Mr. Carrigan says offshore economies are now strong, rather than weak, another sign pointing to a rally.

"I think this market is going to go higher for longer than most people expect. It's going to surprise on the upside," he says. "I can't see this falling apart any time soon."

Value investors have their doubts

To be sure, not everyone buys the election cycle theory. Its strongest boosters tend to be technical analysts, who, like Mr. Carrigan, try to glean clues to future market moves by studying chart movements of past stock action.

For many market players who look at fundamental factors, a mindless formula of investing according to the year of the presidential cycle resembles hocus-pocus.

"We're value investors. We don't put a lot of stake in charts and I'm always wary of confusing correlation with causation," says David Baskin, president of Baskin Financial Services, a boutique investment counsel.

He says investors are best served by relying on good old-fashioned stock picking to make their moves.

Another knock against the cycle is that the Obama administration, to rescue the economy from the 2008-09 financial panic, introduced stimulatory measures very early in its term, possibly advancing the market upturn.

There is also a huge amount of attention on the U.S. election cycle now, another possible warning. When a trade becomes very crowded, it's often a sign that it's outlived its usefulness.

"One thing that we know for sure is that when everybody has identified a trend and jumps on it, then it stops working," Mr. Baskin says.

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