Hey, hey, LBJ, how many kids have you killed today?

Well, well, the Biden decision to withdraw from the presidential race certainly put a new spin on stock market behaviour. According to Ryan Detrick, stock prices don’t behave well during election years of lame duck presidents.

That said, “lame duck” years often refer to a second term president. The closest analogues to the current circumstances could be 1968. When LBJ, under severe pressure over the opposition to the Vietnam war, said on national television, “I will not seek, nor will I accept the nomination of my party”. Baby Boomers may remember the chant, “Hey, hey, LBJ, how many kids have you killed today?”

His successor, Hubert Humphrey, won a controversial nomination (remember the riots outside the convention in Chicago). A divided party lost the White House to Nixon. The market also topped out in 1968.

The second closest analogue was 1980, when Jimmy Carter won a bitter fight for his party’s nomination over Ted Kennedy, Carter, who was also politically wounded over the nomination fight, lost to Reagan that year. The market also topped out in 1980.

Before you become too excited and turn overly bearish, do you want to make decisions based on historical studies of n=2?

Remember the Great Rotation? The Russell 2000 exhibited extreme positive momentum last week. Here is one historical study from Steve Strazza of subsequent returns after returns of 10% or more over a five-day period. Forward returns were strongly positive.

Here is another study from the Short Bear based on 10-day returns of 10% or more, which were also strongly bullish.

 

The Russell 2000 historical studies were based on data that began in 2000. I conducted a similar study using another small cap index, the S&P 600, that went back to 1994. Here are the median returns, based on non-overlapping signals (n=11 if you include the latest episode). Similar to Russell 2000 studies, returns tended to bottom out after 5 trading days and turned up afterwards.

By contrast, the % positive results showed that the short-term bottom was about two weeks, not one week.

As the sample size was small (n=11), here is the full study showing signals with overlapping periods (n=32). Returns started to dip after the first signal, instead of exhibiting further price momentum for an extra two days.

Here are the percentage positive results, which showed a bottom after five trading days.

Now ask yourself the following question: Do you want to rely on a study of n=2, or give greater confidence to studies of n=11, or an overlapping period study of n=32?