How To Monitor The Risk Of A Midterm-Election-Year Stock Correction

Apr. 02, 2014 2:35 PM ETQQQ, RSP, SPY3 Comments
Chris Ciovacco profile picture
Chris Ciovacco


  • History tells us that midterm election years often are marked by a stock market peak in the spring, followed by a new yearly low in the fall.
  • If you are not sleeping well due to fears of a midterm correction in 2014, there are logical ways to keep your fears in check while managing portfolio risk.
  • A simple risk monitoring system is illustrated using midterm-election-year corrections that occurred in 1982, 1990, 1998, and 2010.
  • Since fundamentals will determine the market’s 2014 fate, we revisit the problems of the day in 1982, 1990, 1998, and 2010, noting Russia as a ongoing wild card in 2014.

The Other Side Of The Midterm Coin

In an April 1 article, we cited two midterm election years, 1986 and 1994, as cases where assuming stocks would follow the accepted midterm correction script proved costly. Today, we will look at midterm election years that experienced a mid-year correction and answer the question:

How can we monitor the risk of the midterm-election-year correction pattern in stocks playing out in 2014?

After understanding the "look" of a midterm correction and the fundamentals associated with each historical episode, we will compare those corrective periods to the present day. For those not familiar with the midterm correction theory, the text below provides a good summary:

Midterm election years are typically poor performers for most of the year until finding a bottom in the fall and beginning a rally which lasts well into the following pre-election year. The traditional approach to seasonality during a midterm election year shows the final high (prior to the long period of under-performance) in April.

The Same Concepts We Used In 1987 Example

Regular readers know our approach to the markets basically involves paying attention and making allocation adjustments, rather than allocating our investment capital based on predictions or forecasts. Since we have covered the concepts used in today's article in the past, we will hit the high points below. If you are looking for more detail on how to assess investment probabilities using the charts below, see this video segment from 1987: If It Happens Again, Will You Be Ready?

1982: Falklands War

To monitor the risk of a midterm-election-year correction in stocks, you do not need to know much of anything about reading or using stock charts. A simple visual inspection can go a long way on the risk management front. The 1982-1983 chart below shows the S&P 500 in black/red

This article was written by

Chris Ciovacco profile picture
Chris Ciovacco is the founder and CEO of Ciovacco Capital Management (CCM), an independent money management firm serving individual investors nationwide. The thoroughly researched and backtested CCM Market Model answers these important questions: (1) How much should we allocate to risk assets?, (2) How much should we allocate to conservative assets?, (3) What are the most attractive risk assets?, and (4) What are the most attractive conservative assets? Chris is an expert in identifying the best ETFs from a wide variety of asset classes, including stocks, bonds, commodities, and precious metals. The CCM Market Model compares over 130 different ETFs to identify the most attractive risk-reward opportunities. Chris graduated summa cum laude from The Georgia Institute of Technology with a co-operative degree in Industrial and Systems Engineering. Prior to founding Ciovacco Capital Management in 1999, Mr. Ciovacco worked as a Financial Advisor for Morgan Stanley in Atlanta for five years earning a strong reputation for his independent research and high integrity. While at Georgia Tech, he gained valuable experience working as a co-op for IBM (1985-1990). During his time with Morgan Stanley, Chris received extensive training which included extended stays in NYC at the World Trade Center. His areas of expertise include technical analysis and market model development. CCM’s popular weekly technical analysis videos on YouTube have been viewed over 700,000 times. Chris’ years of experience and research led to the creation of the thoroughly backtested CCM Market Model, which serves as the foundation for the management of separate accounts for individuals and businesses. Copy and paste links into your browser: Market Model: More About CCM: YouTube: Twitter: CCM Home Page:

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