Despite all the hand-wringing about markets in the runup to this election, both historical and empirical evidence of what actually happens after a U.S. presidential election signal an improvement, at least over the coming weeks. But whether a November rally will have legs is less clear, said Bob Lang of ExplosiveOptions.net during Tuesday's "Mad Money," Jim Cramer's CNBC show.
Certainly, investors had reasons to be anxious. Institutional investors, mindful of how the Brexit vote caught them off guard, have been unusually spooked by this election campaign. As a result, they've been on the sidelines. Lang also cited the recent crude oil price drop and prospects of a December hike in the Fed funds rate; last December, when the U.S. central bank hiked interest rates the S&P 500 fell 8% in a matter of weeks.
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Still, Lang thinks that by combining big picture and granular perspectives a more nuanced -- and potentially hopeful -- outlook for the markets emerges, at least in the short term.
"When tomorrow comes and the sun rises, nothing will have really changed for anyone, so everyone needs to relax and focus," said Lang, who's also part of the three-man team behind TheStreet.com's Trifecta Stocks newsletter. "In 2008 after [Barack] Obama was elected, we still had a financial crisis to deal with. Nothing really changed. For those predicting the end of the world, that is a bet that has never paid off."
History provides one reason not to panic, he said. Since 1980, in seven of the nine post-election markets, the bulls have prevailed. Specifically, they rose after four elections and fell after five; but three of those five declines were moderate (4% to 7%) and served as a prelude to rallies.
"If history means anything, the odds favor the bulls," Lang said. He also cited insights from Ryan Detrick of LPL Strategies about post-election market patterns.
"Going back to 1952, the S&P 500 has gained from election day until Inauguration Day in 11 out of 16 elections for an average return of 2.5%," he said. "The median return between election and year end is actually 3.2% because the overall average gets dragged down by the huge 19.9% drop during the financial crisis.
The reality is if the economy is on firm footing and not in a recession as it was in 2008 or falling into a recession as it was in 2000, most of the time the returns have been rather strong for the S&P 500, according to Detrick. Considering the economy currently is probably the best economy an incoming president has inherited since Bill Clinton in 1992, this could be another plus for equities after this election.
The second historical pattern is that November and December tend to be very good months, and not just in election years. Going back to 1950, the S&P 500 has only closed out the month of November beneath its October lows five times. And December tends to be even better. The S&P has only ended December beneath its November lows once since 1950.
Things get a tad more complicated when Lang turns from historical patterns to technical analysis. He admits the charts (see below) have been ugly. The S&P 500 tested its floor of support at the 200-day moving average on Friday, and that floor held. Then the index snapped back dramatically yesterday, up 2.2%. The problem here is with the volume; it was higher when the index was declining, and lower when it rallied yesterday. That suggests to Lang that the big institutions are still eager to unload their positions.
That's confirmed by looking at the Chaikin Money Flow oscillator, which measures the level of buying and selling pressure, said Lang. It's moved into sharply negative territory since late October in the first such decline since January. In other words, institutions are selling and we can't assume it's all election-related uncertainty.
Lang also pointed to the McClellan Oscillator, an indicator (see below) that tracks the market's breadth by measuring the difference between the number of advancing and declining stocks on the NYSE, which has been in negative territory since mid-July and last week sank to levels not seen since the big January selloff.
"We like markets with good breadth where lots of stocks are rising, and we're wary of markets with bad breadth, where the losers outnumber the winners," Lang said. "Unfortunately, this market has a real case of halitosis. This chart is signaling that giant institutions are bailing on stocks."
The most troubling chart for Lang, though, has to be the daily chart of oil -- West Texas intermediate crude to be specific.
He points out that crude recently tested its floor of support at the 200-day moving average for the first time since July, and given that we just saw the biggest weekly buildup of oil inventories in history last week, Lang thinks that oil could be headed back down toward its August lows of $39.
Finally, there's the Volatility Index, the VIX, also known as the fear gauge. Over the past two weeks, the VIX has exploded higher, thanks to all of the election-related uncertainty. Now, according to Lang, whenever we've had a big spike in the VIX in recent years, the averages have sold off, and you've gotten a terrific buying opportunity. He thinks it's possible that this could be another one.
For Lang, the bottom line is that while things have been pretty rough of late, things are likely to improve from now through the end of the year.
"At the very least, after today we'll have one less thing to worry about," he said. "But don't be complacent because the big boys don't like this market for a host of reasons, not just the election, and while they might come back from the sidelines after today, the rest of the indicators say beware of any November rally because it might not have the staying power to hang on until the end of the year."