With just one day before the U.S. presidential election, both political and investing pundits are bombarding us with their advice on who will win and where the stock market will go. As I always hope you will concentrate on the data, not the news.
Regular readers will be familiar with my view that the advance/decline line is the best tool for determining the stock market’s direction. So today, I will again look at the advance/decline action before and after several past presidential elections.
I will use the 20o8 election to explain the basic guidelines and rationale. I am focusing on the NYSE Composite, a very broad unweighted market average and the NYSE All Advance/Decline. I have gone back to 2008 and the S&P 500 as well as the Nasdaq 100 Advance/Decline signals agree with those from the NYSE Composite.
The focus is on the weekly NYSE All Advance/Decline which is a cumulative total of the net advance-decline differential for all instruments that trade on the NYSE. It is plotted in red below the candle chart of the NYSE Composite and in green there is a 21-week weighted moving average (WMA) that is plotted over the A/D line.
In a bull market, more stocks are advancing than are declining so the cumulative A/D line is rising. As long as there is no evidence that the A/D line is diverging from prices any drops below its WMA or EMA are corrective periods not a change in the major trend.
On June 1, 2007, the weekly NYSE All Advance/Decline made its closing high, Then in July the NYSE made a new price high at 10,238 but the A/D line made a lower high, line b. Therefore a negative or bearish divergence was formed. Over the next six weeks, the NYSE and its A/D line dropped sharply into the middle of August as it moved well below its WMA.
From the August low, the NYSE Composite as well as the S&P 500 made their new closing high the week of October 12th, 2007. The NYSE All A/D line did not make a new high as it just reached the bearish divergence downtrend from the June-July highs, line b.
Therefore the bearish divergence became stronger consistent with a transition from a bull to a bear market. The A/D line continued to decline and made lower lows, line d, on election day. It did not turn positive until after the lows in March 2009.
What about 2020?
The NYSE A/D line was in a strong uptrend from the May 2019 lows and rose further in early 2020. It then started to drop sharply at end of February 2020 as the Covid virus started to spread. From the February 19th high to the March 23rd low the S&P 500 declined 34%. The magnitude of the decline was as sharp as several past bear markets but it was much shorter than most bear markets.
By the end of May 2020 the NYSE A/D line moved above its WMA and by July the resistance at line b, was overcome as the A/D line was in a strong upward trend. In September and October , the NYSE corrected 7.5% as part of a ten week trading range (not shown on the chart) The NYSE then gapped higher the week after the election, starting a new strong trend that lasted for most of 2021.
The election results in 2016 were a surprise to most as even President-elect Donald Trump commented that he “really assumed he had lost.” The chart above shows that the NYSE Composite after a high in May of 2015 had a prolonged decline until February of 2016.
The NYSE A/D line dropped down to long-term support, line b, in early 2016. But by February 13th, there were signs from the daily A/D lines, that the stock market was bottoming. The A/D line moved back above its WMA and then overcame the May 2015 high.
In September 2016 the NYSE Composite and the other major started to correct as the NYSE declined 5.7% before moving sharply higher in reaction to the election results. The stock market stayed strong during 2017 as the S&P 500 was up 19.4%.
So how about now? The current chart of the NYSE Composite as of the close on Friday, November 1st shows the recent two-week decline but the NYSE is still over 2% above the 20-week EMA at 18,967.
The NYSE All A/D line moved to a new high in March of 2024 as the late 2021 high, line a, was overcome. The A/D line has corrected over the past two weeks but shows a solid uptrend for the year as it is well above rising EMA.
Therefore despite what craziness takes place over the next few days or few weeks, this analysis indicates that the stock market will stay strong into 2025 and move higher no matter who is elected as the new president.
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