Monday, August 8, 2011
Forget about the panic. Forget about the gut-wrenching, portfolio-busting decline last week. Buy stocks now. They'll be higher by the end of the year.
I know it seems like an outrageous prediction – especially coming from someone who has preached caution for most of the year. But last week's market decline was more than just a buying opportunity. It was Christmas in August. And it set up the potential for double-digit gains over the next four months.
Let me explain...
You see, 2011 is the third year of a presidential cycle. According to numbers put together by my friend Steve Sjuggerud, stocks have gone up every third year of a presidential cycle since 1940. And the average increase each year is 22%.
The theory is... stocks go up in anticipation of Big Government stimulating the economy as we head into the election year. Whether you agree with the premise or not, statistics back up the theory. Seven decades of data tell us stocks go up in the third year of a presidential cycle. Even in 1987 – the year of the big crash – stocks closed higher on the year.
As you may recall, we kicked off 2011 to plenty of talking heads cheering about how this would be a wonderful year for stocks because it was the third year of a presidential cycle. I even conceded stocks would close higher on December 31, 2011 than they did on January 1, 2011 – though I was worried about what they might do in between.
Of course, no one is talking about the theory now... just about how everyone has turned bearish.
From a contrarian standpoint, this is where we have to buy.
Think about this... If stocks follow the historic pattern and close up on the year by just 1%, that's a 9% gain over the next five months. If stocks eke out the meager 4% gain they achieved during the 1987 crash year, that's a 13% return from current levels.
But if stocks can generate the average 22% return during the third year of a presidential cycle... well then, like I said... it's Christmas in August.
I've been cautious to bearish for most of the year. But I'm bullish now, and betting on big gains through the end of the year.
Best regards and good trading,
"Stocks are relatively cheap now... Individual investors are scared... All we're missing is the uptrend," Steve wrote recently. His conclusion: The correction is likely over.
Fear index "VIX" touches its highest level since May 2010... up 75% for the week at one point on Friday.
Gold rises 3% over the past two weeks as the S&P 500 and Nasdaq both fall 10%.
Oil returns to February levels.
"Clean energy" companies drop to 52-week lows... including First Solar and electric car battery makers.