Of 6s and 7s: Market Timing With QLD

| About: ProShares Ultra (QLD)

We are in the midst of one of the best cyclic investment opportunities to come around - the last two years of the four year Presidential Cycle. The third year of the Presidential Cycle (the one we are in now) is not really a calendar year, but rather an extended 12 to 18 month span of time that begins during the second year before the election, and runs early into the 4th year. We began this particular cycle in July 2006, and it's now in full swing.

Just how good has the third year of the presidential cycle been in times past, and what could we expect this time around? The results below are for the calendar years only, and do not include the efficacious buildup that occurred before them. But these buildups are significant. For example: During the second term of the Clinton presidency, the third "year" of the presidential cycle - that ran from October 1998 to March 2000 - the Nasdaq composite rose 270%. During the first term of the Clinton presidency, the third year of the presidential cycle - that ran from December, 1994 to June, 1996, the Nasdaq rose 73%. During the first term of the Bush presidency, the third year of the presidential cycle - that ran from October, 2002 to January, 2004, the Nasdaq rose 91%.

I hope I'm getting your attention with these statistics. These historical returns are the reason I expect outsized gains again this year. I currently use the QLD as a proxy to trade the Presidential and yearly cycle, a strategy I call the Ultra Investor. The Nasdaq's year-to-date (YTD) 2007 performance is still quite modest considering the historical record.

The only outlier in this bullish scenario is the particular performance of either the number 6 or 7 year of each decade. They are some of the worst on record. Even during the third year of the presidential cycle, things like the 87' crash can occur. This is of particular note this year because the Asian indexes are so far extended past their 200 day moving average. Remember the 1997 "Asian Flu" and currency crisis in Q1?

A second set of statistics that is a little better known is the "Sell in May and Go away" cycle of the market. $10,000 invested in the Nasdaq composite from November 1 to June 30 of each year would have gained $332,000 since 1971. Using a mechanical MACD signal, that return would be doubled. If you had invested $10,000 in only the four-month July to October period you would have a loss of $4,100. Using this trading strategy would have also kept you out of the bulk of the worst months of the Nasdaq bear markets since 1971.

The results for the Dow are similar, except the time frame is shortened to the 6 months from November 1 to April 30th. $10,000 invested in the Dow during just those 6 months would have gained $534,000 since 1950. The other six months of the year - May 1 through October 31st - would net you a $272 loss.

A third set of statistics is the "most profitable times". The most profitable months are January, December and November (in that order).

The first trading day of each month is always the best (by a long shot). Over the last nine years the Dow has gained more points on the first trading day of the month than all the other days of the month combined. From September 2, 1997 through June 1, 2006, the Dow gained 3637 points. It is incredible that 4420 points were gained on the first trading days of these 106 months. The remaining 2095 trading days lost 782 points. So much for buy and hold. A single trading day - less than 5% of the total trading days available - produced all the returns

Selling on Fridays can be a mistake - Mondays and Tuesdays are the most bullish days of the week (Buying a severely negative Nasdaq composite at the close on a Friday afternoon, or after the open on Monday, is almost always a winning trade of 2 to 3%).

A bullish time for the Nasdaq is the summer rally that occurs between June 25 and July 20th. August and September are the worst months, except for August 2000 (one of the best on record), and we all know what happened after that. August and September are for vacationing with the family, period. If the mavens of Wall Street know this and turn off their PCs for the sake of the Poconos or the Hamptons - why shouldn't we? Statistically you won't miss much while you're gone. Besides - even if there is a little up/down blip while you're away - the market usually brings it right back down after Labor Day to where it was when you left.

In conclusion, next time you're sitting around the dinner table with neighbors and friends and this old saw gets trotted out, "You can't time the market. Just hold for the long term", assure them the nonsense of that statement. It was probably invented by money managers (during the great bull market of the 1990s) to keep customers in line and their monthly fees ($) coming in.

The poet of Ecclesiates III says that for every thing there is a season, and a time for every purpose under heaven, and it was never more true than with investing.

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