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Amateur Investors Weekend Update (9/30/06)

http://www.amateur-investor.net/Weekend_Market_Analysis_Sep_30_06.htm

Here is some historical perspective involving the performance of the Dow in the 4th Quarter during Mid Term Election Years. Since 1920 there has been 21 Mid Term Elections and the Dow has ended the 4th Quarter with a positive return 17 times out of of 21 or 81% of the time. The average return on those 17 years was +8.5% with the best year in 1982 when the Dow was up 16.8% in the 4th Quarter.

To expand things further I then went back and looked to see what happened when the 3rd Quarter had a positive return and what affect that had on 4th Quarter Performance during the Mid Term Election years. There were 12 Mid Term Election years when the 3rd Quarter had a positive return. Of those 12 years the Dow ended the 4th Quarter with a positive return 9 times or 75%. Meanwhile I also looked at those Mid Term Election years in which the 3rd Quarter had a negative return which occurred 9 times. Of those 9 years 8 ended with a positive return of 89%.

Thus from this analysis it appears that during a Mid Term Election year the highest odds of a positive return for the Dow in the 4th Quarter is when the 3rd Quarter finishes with a negative return. The Dow ended the 3rd Quarter of 2006 with a positive gain thus the odds of the 4th Quarter ending with a positive return are now 75% as compared to 89% when the 3rd Quarter ends with a negative return during a Mid Term Election year.

No matter what happens the odds are still stacked in the Bulls favor for a positive return in the Dow for the 4th Quarter although based on historical analysis the odds would have been higher (89% versus 75%) if the Dow would have had a negative return in the 3rd Quarter of 2006.

As far as the major averages they have become rather overbought and I expect we will see some type of pullback develop before much longer. Also if we take a look at the Volatility Index (VXO) it has been very close to the 10 level for the past two weeks so investors have become rather complacent. As we have seen during the past two years when the VXO has dropped to 10 or below (points A) this has either been followed by a correction (points B to C) or a consolidation period (points D) in the S&P 500 shortly thereafter. At this time it's hard to determine whether we will see a substantial correction like occurred this past Spring and in the Summer of 2005 (points B to C) or whether a consolidation period will develop like occurred late in 2005 (point D).