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The Election Cycle: What to Expect in Stocks and Bond Prices

Keep in mind volatility is higher, which meaning risk per trade is higher. In the long run you stand a much higher chance of making money trading with the trend than trying countertrend trades (picking a top).

So, as you can see below, it looks like the stock market will be trying to put in the bottom over the next week or two, which falls in line with our election cycle. It is very important to know that during intermediate cycle lows is where some of the biggest drops take place.

These sharp drops are what is needed to cleanse the market one last time, to shake as many traders with tight stops out of the market before it reverses and starts the next rally. I would like to see a one- to three-day market selloff as that would be the signature bottoming pattern I like to buy.

Keep in mind that any index or high beta stock can be traded using this same cycle including Apple (AAPL), SPDR S&P 500 ETF (SPY), iShares Russell 2000 Index (IWM) and PowerShares QQQ Trust (QQQ).

Bond Prices -- Moving Against the Norm...

Bond investors are some of the most conservative people in the market. They do not like to take risks so they dump their money into bonds to make a tiny profit in exchange for low risk (volatility). The nature of these investors put more money into bonds as we enter the election because they are nervous about not knowing who will be in control of the country.

After the election finishes some money flows out of bonds and into stocks because there is a president and direction for the country. Generally, comes the new year, investors move to bonds as a safe haven as they try to figure out what their game plan is for new year.
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