This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

How to Trade the Midterm Elections

MILLBURN, N.J. (TheStreet) -- The election of Republican Scott Brown to fill the late Ted Kennedy's U.S. Senate seat set off a political tidal wave in Washington. The Senate Democrats no longer have the 60 votes necessary to assure cloture (a vote to end debate), putting health care legislation in jeopardy and raising the stakes for upcoming midterm congressional elections, which will likely be heating up much earlier than usual.

In 2008, I wrote about how to trade a presidential election. With the 2010 midterm elections on our horizon, let's investigate whether we can come up with some guidelines for trading those.

Note that I have accumulated data for the S&P 500 going back to 1950, a midterm election year. Thus, 2009 (a post-presidential year) represented the end of the 15th presidential election cycle in my database.

The Presidential election cycle is comprised of four distinct years:

1. Year Before Presidential Election
2. Presidential Election Year
3. Post-Presidential Election Year
4. Midterm Election Year

First, let's take a look at how each of these years and the constituent quarters has performed on average in each of the election cycle years:

Quarterly S&P Performance by Election Cycle Years

Furthermore, we can look at how each of the months has performed on average by year in the election cycle:

So, armed with this data, can we trade the midterm election year? I believe we can, and here are three ways to do it.

1. Sell in May and Go Away

You might have heard the old maxim "Sell in May and go away." But if you look at the monthly average returns, the only historically negative months are February and September. So "Sell in May and go away" might be little more than an old wives' tale -- except when it comes to the midterm election year.

The second and third quarters of the midterm election year -- and in particular the months of May, June, August and September -- tend to be down months. Thus, it may make sense to sell or sell short the SPX at the end of April and wait until the end of September to cover your shorts.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,979.13 +59.54 0.35%
S&P 500 1,986.51 +4.91 0.25%
NASDAQ 4,526.4820 -1.0320 -0.02%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs