Midterm elections are here. Lots of traders and investors are talking about “if the Republicans/Democrats win/lose, the stock market will (insert random guess here).

This “analysis” is no better than a coin toss. Nobody knows how the election will play out, and more importantly, nobody knows how the stock market will react to the election in the short-term. Guessing the news/politics is not a good use of one’s time.

Let’s analyze the stock market’s price action by objectively quantifying technical analysis. For the sake of reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

*Probability ? certainty.

Problems for the stock market in 2019

We expect the economy to deteriorate in 2019, which is why we’re looking for a bull market top sometime in mid-2019

CNBC published a very interesting chart recently.

Based on current estimates, year-over-year earnings growth will peak in mid-2019 and then start to fall.

Past bull market peaks (1969, 1973, 2000, and 2007) have coincided with a peak in earnings growth or an already declining earnings growth.

Sentiment is starting to turn around

Last Thursday we said that “the Put/Call ratio is extremely high right now, which is medium-term bullish for the stock market”.

The Put/Call ratio’s 15-day moving average (3 weeks) is finally starting to come down.

Here’s what happened next to the S&P 500 (historically) when the Put/Call Ratio’s 15 moving average fell 4 days in a row after being above 1.15 (i.e. right now).

*Data from 1995 – present

As you can see, the stock market has a strong tendency to go up 2 months later. Now granted, some of these cases are overlaps.

This is the same study, excluding overlaps.