Will We Get A Midterm Melt-Up?

1.) MIDTERM – Markets do not care about politics. I know that can often be an unpopular fact, but it’s true. Midterm election years get noisy with all the political banter and ads. Again, the market doesn’t care. But if you remove the politics and just study what stocks have actually done over history, one pattern keeps showing up. The market has often found an important low sometime during the midterm election year. From there, it has frequently rallied all the way into the following year, the year before the next presidential election. On average, the S&P 500 has gained more than 46% from the midterm-year low to the following year’s high. What’s interesting about this is that we’re entering the part of the calendar when investors start getting nervous. August and September have earned a reputation for being difficult months. Maybe this year will be no different. Maybe we see some weakness. If we do, history suggests that weakness during a midterm year has often created opportunities instead of permanent damage.

2.) US DOLLAR – What could be the catalyst for that late Midterm rally to kick in? The US Dollar. The U.S. dollar is sitting at an important level. US Dollar positioning has become stretched. If the dollar breaks lower from here, it could become a major tailwind for risk assets. Commodities could benefit. Metals and mining stocks could benefit. Industrials could benefit. Financials could benefit. Technology doesn’t have to stop working, either. Leadership can rotate without ending the bull market. A Midterm Melt-Up isn’t about Republicans or Democrats. It’s about recognizing one of the most consistent tendencies in market history. A good sign might be the Dollar breaking down. If the trends begin breaking down, we’ll adjust. But until they do, history argues that we should spend less time worrying about the next election and more time paying attention to what stocks are actually doing.

3.) KOSPI – What could be a catalyst for a late summer pullback? KOSPI – South Korean stock market. We’ve discussed before how the SK market can be a harbinger for technology. Overnight, the KOSPI was down another -8.95%, down -28% from the June high. Year-to-date, the KOSPI is still up +58%. Again, this still isn’t abnormal. What’s different at this singular moment is that it closed below trend. Is that a death knell? No. One day doesn’t set a new trend…but 3 days below trend could. At the end of the day, Korean stocks are now trading at their cheapest valuations in history. This is probably why we’re also starting to get “buy” signals on the KOSPI within an oversold condition. I’d expect a bounce here soon, but how it acts around 8,000 will be important. If the KOSPI fails, does it automatically mean that it will roll over to the US? No. History doesn’t suggest that. But the current action still has my attention.