In this issue I'd like to continue reviewing some of the timing techniques which can be used to improve performance in the stock market. One of the factors often mentioned when the topic of market timing comes up is the Presidential Cycle. Typically an explanation runs something like this: In the year before an election presidents will attempt to get the economy rolling in order to bolster their chances of winning reelection. The theory then suggests a contraction sets in shortly after the president takes power. Jeffrey and Yale Hirsch, authors of the Stock Trader's Almanac, refer to this as the "Post Election Year Syndrome". As they put it: "The year begins with an Inaugural Ball, after which the piper must be paid. . .â" Though it seems doubtful that presidents as a group would consciously foster a slow-down through monetary and fiscal restraint, perhaps it can better be understood as an inevitable result of the preceding loose money policies. As they or their predecessors offer tax rebates, push interest rates down or foster government expenditures in an attempt to get the wheels of industry turning faster, so the machinery must inevitably slow down as the effects of those stimulants wear off.

Another explanation for the phenomenon could be made simply on the basis of public mood and anticipation. It is often stated that one should “buy on the rumor and sell on the news” which is to say that an effect on a given security by some eventuality such as a drop in sales is likely to occur in advance of an actual announcement since keen observers (and more brazen insiders) are apt to trade the security before the public catches wind of the change. By the time the actual announcement is made the effects on the stock have already been felt and it is time to sell. Implementation of such a strategy is in practice very difficult as getting access to “rumors” before they become “news” is nearly impossible for someone who isn't actually on the trading floor or who has no inside line to the particular firms being traded (which, for the record, is illegal anyway). Still, the theory is sound, and is confirmed by the fact that so many public traders lose money when they do the opposite: i.e. buy a stock after a bit of good news becomes public. At that point, astute traders are unloading the stock into the public demand.

The point is that presidents are generally perceived by the public to be important to the performance of the economy, and therefore the stock market. However the order of causation is more likely to be in the other direction from what is generally supposed. A typical conception is that a good president can improve the economy through appropriate policy, at which point the stock market responds by moving higher. But in fact the stock market almost always leads expansions and contractions in the economy. Whether it is actually “causing” those expansions and contractions is open to some debate, however the reverse wouldn't make much sense. If a move in the stock market precedes changes in economic activity, how could that activity be said to be causing the stock market to move? As I will show, it is further doubtful that presidents have that much effect on either, but first I'd like to look a bit deeper at the question of causation.

What exactly is causation?

The notion of cause and effect is a very anthropomorphic concept stemming largely from the peculiarities of human experience. It is not only overused, it is often misapplied. In the universe of observable phenomena, very little can be reduced to simple cause-effect chains, as inevitably there is feedback, different levels of analysis, issues of time scale, even basic ontological questions about what exactly is the object under examination. To take a simple example, one could say that one billiard ball which is in motion strikes another "causing"ť it to move. However it is just as true to say that the motionless ball “caused” the one in motion to suddenly reduce its speed. Why do most people perceive the ball in motion as the one possessing the causative power? This is probably due to anthropic tendencies to - in a sense - "relate" to the ball in motion. It is the most analogous to our own activities when we want to have an effect. Suppose someone jostles you in public and you subsequently trip and fall, no doubt you will see the stumble as "caused"ť by the other person's action especially if you are relatively motionless at the time. Nonetheless, from the standpoint of physics you will be imparting an equal and opposite effect to the person in motion. Though your fall may be more dramatic, whatever causation is occurring is entirely mutual between the two interacting bodies.