Insights & Advice

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Risk On

It is time to put cash to work. This weekend the Greek electorate goes to the polls. Anything can happen and that’s why it is a good time to invest.

I would rather be in the markets going forward, despite the possibility that voters may elect the more radical, anti-austerity party. If so, the markets would probably sell-off. I would be a buyer of any further stock market declines.

On the other hand, the more moderate parties might win in Greece and markets would rally next week on the news. Either way, I am a buyer even though the markets could still experience a sell-off. Something could go wrong in the short-term and we could see the 1,250 level tested on the S&P 500 Index.  I would simply buy some more if that occurs.

Why am I bullish?

Events in Europe are coming to a head. I believe that both the European Union and its central bank are going to backstop investors in the event that a crisis develops after this weekend’s events. In other words, we may get a sell-off (possibly sharp, but short) before the European authorities step in and do whatever is necessary to calm the markets. I alluded to this possibility in my columns over the past few weeks.

Yesterday, Reuters and other news sources cited several unnamed EU sources who basically promised intervention if it becomes necessary. Markets jumped as investors realized that they now have a put against a financial calamity in Europe.

On this side of the pond, the Federal Reserve Bank Board meets next week. I am not looking for an announcement of another stimulus program, although if it were to be announced the markets would explode higher. There might be some disappointment if investors don’t get what they want but once again, I would be a buyer of any sell-off.

You see, it is just about that time of the year (within a presidential election cycle) when investors begin to focus on November and the prospects for positive change in Washington, D.C. Now, neither you nor I really expect anything of the sort, yet, hope springs eternal in voters’ hearts. I thought it would be useful to repeat what I wrote in my May 3rd column “Sell in May”:

“A recent report from Ned Davis Research pointed out that the Selling May strategy doesn’t work nearly as well when it occurs in a presidential election year. They looked at every presidential election since 1900. Investors on average would have missed a hefty 4.4% gain as measured by the Dow Jones Industrial Average in those years by selling in May. If an incumbent wins, the gains are even higher (7.6%).

Now, before you reverse course and buy everything in sight, a word of caution is appropriate. The same study did show that, on average, a correction did occur during the second quarter of presidential election years. The duration of the pull back is what differs.

Usually, a summer rally occurs after the second quarter sell off in an election year. When the incumbent party has lost the election, the summer rally fizzled out and the Dow made a new low in late October, followed by a weak year-end rally. When the incumbent won, the summer rally was stronger and the pull back in the fall was mild, followed by a strong gain into the end of the year.”

Well, readers, everything seems to be unfolding exactly the way I thought. We had our correction, June is almost over and the summer rally should be approaching. Granted, I may be early since we still have two weeks left in the second quarter, more than enough time to decline, if that’s what the markets want. For me, it is close enough to start putting that cash back into equities and that’s what I’m advising you to do.

 

Posted in A Few Dollars More, At the Market