With the U.S. capital markets moving in anticipation of the 2018 midterm elections on November 6, a post-election rally could be imminent given recent historical data, which could benefit the Direxion Daily S&P500 Bull 3X ETF (NYSEArca: SPXL) and the Direxion Daily S&P 500 Bull 2X ETF (NYSEArca: SPUU).
October 2018 has been one to forget for U.S. equities as sell-offs, particularly in the technology sector, fueled declines in the Nasdaq Composite, which fell by 9.2%, making it its second largest decline since it fell 10.8% back in November 2008. Things weren’t much better for the S&P 500, which followed the Nasdaq into correction territory and fell by 7% in October–its worst month since September 2011.
The Dow Jones Industrial Average fell 1,300 points or 5%, which hasn’t happened since January 2016. Investors were rocked by copious amounts of volatility after a decade-long bull run that has seen the growth fueled by FANG (Facebook, Amazon Netflix, Google) stocks dwindle as the technology sector fell into correction territory.
However, after all that volatility, there appears to be the proverbial light at the end of the tunnel.
“18 out of 18 times the S&P was higher from the October low close–up just over 10% on average,” said LPL Financial’s Ryan Detrick on CNBC. “So it doesn’t mean you have to gain 10%, but the bottom line is that October 29th low, especially with the strength in the last couple of days really could be a major low and seasonality again, November-December of a midterm year, normally are strong.”
“We still see more positives than negatives for a year-end rally here,” added Detrick.
SPXL seeks daily investment results equal to 300% of the daily performance of the S&P 500® Index. SPXL, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.
SPUU seeks daily investment results worth 200% of the daily performance of the S&P 500® Index. SPUU invests at least 80% of its net assets in securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.
After creeping below its 200-day moving average during the volatile October month, SPXL has already recovered ahead of the midterm elections in the last five days:
Likewise, the same for SPUU:
Stocks are Perfect 18-for-18 in Post-Midterm Elections
If history repeats itself, according to Stephen McBride of the RiskHedge Report, it could bode well for stocks and in turn, three exchange-traded funds (ETFs). As McBride noted in a MarketWatch article, stock movements into the green are a perfect 18-for-18 following midterm elections–the type of sure-shot accuracy that could rival even basketball star Stephen Curry from the three-point line.
“Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Every single one,” McBride wrote. “That’s 18 for 18. Even though we’ve had every possible political combination in the past 72 years. Republican president with Democratic Congress. Democratic president with Republican Congress. Republican president and Congress. Democratic president and Congress.”
It’s not just accuracy, but also the extent of the rise as McBride noted that following midterm elections, stocks have gone up by an average of 17% and even higher from their lows–32%. McBride also alluded to the latest October sell-off as standard fare when reacting as a precursor to midterm elections.
“There’s one last important point you should know,” wrote McBride. “Leading up to midterms, U.S. stocks typically perform poorly. From January to October in midterm years, they drop an average of roughly 1%. In all other years, stocks rise roughly 7% in that time frame.”
CNBC underscored this point regarding the S&P 500 index in particular in the chart below:
In order to capture the subsequent run up in stocks, investors may want to consider three ETFs that track the S&P 500 to take advantage of the post-midterm election gain. Investors are hoping a rise in U.S. equities for a 19th consecutive time are in store, which is a much-needed break after October’s volatility.
“For all the market’s gyrations in the past few weeks, the S&P 500 is roughly flat this year,” McBride wrote. “If we stay on script, we should expect the market to surge in November after the uncertainty of the elections is behind us.”
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