Will this rally ever end? Are politics driving the uptrend?

Weekly S&P

Weekly S&P

This stock market rally has been quite persistent. It seems every attempt at a pullback is quickly met with buyers rushing in. There seems to be an urgency in their buying. You can even see it on the intra-day tape. There are few downticks that have any persistence. On the weekly S&P ETF chart above you can see the straight line of the uptrend from the March lows. There was one pullback in July that brought prices right down to the moving averages (blue lines). This created a sort of lopsided bullish inverse head and shoulders pattern – a pattern that once seemed to have predictive powers but now is too wide followed with reduced edge, but seems to be working in this case. The red horizontal lines are the fibonacci retracements, which in my opinion are worthless, however the 50% retracement, which is the middle red line, was an interesting level. It initially stopped the rally in September, and that level corresponded with the huge gap down from almost exactly a year ago. That gap was fill recently and prices dropped back to the faster moving average (cyan line). That pullback brought the double stochastic (black line in lower sub-graph) to oversold, and the rally this week caused momentum to turn back up. The technicals are almost working like a beginning text book on technical analysis. It’s almost too perfect. Something has to break down. Certainly some of this action was most likely self-fulfilling, as common chart point or popular moving averages can cause some degree of buying or selling, usually without lasting moves. But something just feels insidious about all this. Maybe it’s just my contrary nature.

It’s difficult to understand this trend with the economic and political background. The stock market can often seem to defy logic and reason. Markets are discounting mechanisms, so often the current conditions and current news are at a disconnect with current perceptions of valuation. The stock market doesn’t really care what the employment numbers are today, although employment reports can have a huge effect on prices around when those numbers are released. Market makers need to run stops in both directions and reports are an excuse to do so. But the market is more concerned about where employment numbers will be a year from now, not today.

So does this market see better times ahead? I think the political environment holds the key to one piece of the puzzle. I know it is annoying to some readers to digress into politics when trying to analyze the market, and I have a tendency to do that often. And I don’t want to anger readers that have political views that are opposite of mine. But the political climate can have a huge impact on the direction of the market, so to not discuss it would be leaving out an important element, obviously.

The stock market suffered a huge drop as we all know, and that drop accellerated just prior to the election. The culprit was of course the bust in the housing market and the resulting credit problems. That snowballed into many other problems, most notably the lagging indicator of high unemployment. The timing of all this seems suspicious to me. And it seems strange that the obviously overvalued housing market correction could have snowballed into such a huge problem that would have required bailouts, huge market losses, and the destruction of the currency. All this seems to be getting worse as the market marches ever higher, as if it doesn’t care. One explanation is that corporate profits are improving. But are they really improving? Are they improving from depressed levels? Are they improving from cost cutting? Is it the drop of the dollar toward zero? The consumer has to come back into the market for profits to improve and grow in a sustained way. They can’t tap into home equity anymore. Ultimately employment will have to grow to get the consumer confident enough to start buying things again. Yet the stock market doesn’t seem to care. So what is it discounting?

I think part of the bear market last year was the perception that the country would take a giant leap toward socialism. It was obvious that a democrat would be the next president, and congress had already switched back to the democrat side. It was clear that a radical left president with a congress lead by Reid and Pelosi would probably be able to pass any leftist agenda they wanted. In the beginning the more moderate by comparison Hillary looked like a sure thing. The market was trending down a bit but not aggressively. When Obama took the lead the market accelerated down in a more meaningful way. This might be a coincidence. I’m sure the Obama supporters will think there is nothing to this. But price action on the charts don’t lie. The housing crisis was totally to blame by the media, but this still shouldn’t account for such a severe drop in my opinion. Uncertainty about the future direction of the country could explain part of it. Obama was very clear and honest about his intentions and about his vision for the fundamental change he wanted to make. His views on politics were clear for all to see. His associations and political affiliations were well known. His lack of experience was also clearly known. The public didn’t seem to care. They just wanted anyone other than a republican in the white house. The news media really created and accelerated this condition.

Now the Kook-aid is starting to wear off. It is clear now that the socialist agenda of the extreme left is not a sure thing. All of Obama’s plans, all the things he promised during the election seem to be put on hold. The public is waking up. Reid and Pelosi still hope to Rahm these policies through. Obama said during the election that anything he voted on would be posted online for the public to read. That will not happen. That has been voted down. They know the public would not stand for what they are trying to accomplish. There is now less transparency than ever. The public is not taking this sitting down. As poll numbers are dropping and the public is becoming more worried and involved, there is a greater chance that the mid-term elections next year could change the balance of power once again, and render Obama’s Marxist vision of this country nothing but a close call. This happened in 1994 to some degree. Hopefully it will happen again. But this time it is more urgent as the stakes are much higher.

I believe that the stock market would suffer irreparable damage under a socialist system. It can work in Sweden and other smaller countries to some degree, as long as there are other capitalist countries available to lean on. But it cannot work in the US. It would destroy most of the essence of this country. We can’t turn our workforce into an ant colony. What Obama wants is fundamental change we can’t and shouldn’t believe in. I think the neutering of his ideas is what the stock market is seeing a year down the road.

2 thoughts on “Will this rally ever end? Are politics driving the uptrend?

  1. Hi Doug, The market top is tuesday the 13th,be ready look for a decline into mid to late november 15-20% jeff

  2. wow, interesting about the political dimension. This is the first website to discuss the market in this way. Thanks!

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