How the market can break free of sixth year hold

August 19, 2014 4:43 PM

It’s been a little more than three weeks since I last updated the Sixth Year of Presidential Term historical pattern chart. At that time, it was noted how closely 2014, a Sixth Year, was following the pattern and based upon the historical pattern a 4-6% pullback was likely sometime during August and September. DJIA and S&P 500 did precisely this by the fifth trading day of August and have been rallying since. 

Geopolitical events, mainly the standoff between the West and Russia over Ukraine and escalating chaos in the Middle East (Israel’s invasion of the West Bank and ISIS on the move in Iraq), and concerns that recent economic data would prompt the Fed to raise interest rates sooner than anticipated were the catalyst for the pullback. These concerns have eased and second quarter earnings were much better than originally expected. Although the Sixth Year pattern suggests further weakness through September, improving earnings and economic data are likely to set a floor for any pullback. Should DJIA and S&P 500 breakout to new highs, the floor will likely be the early August lows. However, if they come up short of new highs, then August’s lows and below would be in play.

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