Election Uncertainty Is Making Investors Nervous

 

by Dr Joe Duarte
October 15, 2012

How It All Went Wrong Between Obama And Business

Many large company CEOs have recently confirmed, via public statements, both written and spoken, what Bob Woodward described in his latest book "The Price of Politics." Big business turned against President Obama in the early days of his presidency and the GOP made a concerted effort to block the president's

To us, the most revealing passage in the book came as Verizon CEO Ivan Seidenberg had an exchange with presidential advisor Valerie Jarrett. Mr. Seidenberg tried to tell Ms. Jarrett that Mr. Obama's rhetoric of "fat cat bankers" and "reckless practices" was being seen as anti-business. Ms. Jarrett, according to the book, was mostly unresponsive. Mr. Seidenberg was invited to a Super Bowl viewing party at the White House after the exchange. Mr. Seidenberg saw that as a good sign. But at the party, Mr. Obama exchanged some perfunctory greetings and pleasantries with Mr. Seidenberg, who was expecting some kind of attempt at an understanding to develop, and then, according to Woodward's account of the meeting, ignored Mr. Seidenberg for the rest of the day. Woodward writes that the president watched the game with his buddies as Seidenberg fumed.

Seidenberg called Jarrett out on the way the Super Bowl party had gone wrong. Ms. Jarrett, according to Woodward, told Mr. Seidenberg that he should have been glad just to have been with the president. Mr. Seidenberg responded to Ms. Jarrett by saying that business had been around forever and would be around when Mr. Obama left the White House. According to Woodward he then told her that business could wait Mr. Obama out.

And as the election nears, we are starting to see the effects of those exchanges between the president, Ms. Jarrett, and Mr. Seidenberg. Job growth is weak. And now earnings are starting to show some weakness as well. So the big question is whether the U.S. economy has been held back for so long that it won't be able to rebound, no matter who gets elected president.

Still, there are some signs that the economy has improved. Housing seems to have bottomed, although some see it as temporary. There have been some jobs created, although there are plenty of asterisks. And there is some traffic, a bit more often than six months ago, at retail outlets. Highways are busier more often it seems. And there is plenty of publicly funded highway repair and expansion work ongoing.

Yet, the polls have clearly shifted toward Mr. Romney as Mr. Obama's debate performance was lackluster, and the president seemed unenthusiastic. A lot can change over the next couple of weeks. But the election is clearly about to hit a crescendo.

Here are some plausible scenarios about how things may turn out. There may be more possible permutations of this. But these are some of the ones that came to us as we wrote.

Romney wins and we start seeing an improvement in the economy. Romney wins, he opens the real books inside government and has an apoplectic fit because things are much worse than he thought they would be. Romney freaks out and things don't improve because he sits in his office, the lights out, and he shakes uncontrollably. Nothing happens and we get riots in the streets as people get impatient.

Obama wins and business doubles down. We get riots in the streets. And then we go into an Atlas Shrugged scenario. Obama wins and things don't get any better. Obama wins and the people decide that it's time to take the business guys and the politicians to task. Then we get riots in the street.

Anyone of those scenarios is plausible, especially the riots. This is what happens when the Social Cycle turns.

And we bet that each big investor, hedge fund, mutual fund, and Wall Street bank of any kind with math guys on their staff, has put those scenarios and several others on the table. They have also very likely begun to devise strategies for any of these possibilities. That means that billions of dollars in derivative bets that no one knows about may have already been deployed.

What it all boils down to is that no one knows what will happen. Polls are clearly suspect. Economic data is full of statistical adjustments. And if you drive down the street of any city you will see that some businesses and some people are doing o.k., while others are not.

In other words, the uncertainty, and the volatility of life is evident everywhere. It's raw, it's not quantifiable, and it's impossible to model, no matter what anyone says. We are all flapping in the breeze now, waiting for the election and its aftermath.

The S & P 500 (SPX) has clearly made a double top. The most recent failure to move prices higher was on 9-17, just a few days after the Federal Reserve began its QE 3 maneuvers. In fact, the market only got two good days of rally after the news. That, in our opinion, is an ominous sign.

The index is now fighting for support at the 50-day moving average. To be sure, moving averages are not as reliable as they once were for trading signals. But they are still useful as support and resistance benchmarks. In our opinion, the more important support level was 1440. That has now given way and become fairly significant resistance. That's the take home message. The market is struggling to find buyers at support, but not having much trouble finding sellers at resistance points.

Even more significant is the fact that the lower Bollinger Band (lower blue band) is starting to slope downward. This is a sign that the weight of prices is to the down side. The bands had been shrinking over the past couple of weeks. When this happens it means that a big move is beginning to form. In this case, barring a major turnaround, it looks as if the big move forecast by the Bollinger Bands is going to be to the down side.



Chart Courtesy of StockCharts.com


The small stocks in the Russell 2000 index (RUT) are no better off than the blue chips in the S & P 500. In fact, small stocks broke below their 50-day moving average, and now face a possible test of support at the 200-day moving average. The 200-day moving average is the dividing line between bull and bear markets. If the small stocks break below this key barrier, and don't rebound, we could be in for some tough sledding for some time.



Chart Courtesy of StockCharts.com


The market's breadth has now deteriorated significantly. The Nasdaq Advance Decline line (NAAD) has broken to a new low, continuing the disturbing pattern of lower highs and lower lows, defining a down trend. This is very negative.



Chart Courtesy of StockCharts.com


Up side momentum has stalled. The Nasdaq Hi-lo line (NAHL) is no longer rising. This means that there is little urgency on the side of buyers to keep bidding prices up. This is a negative.



Chart Courtesy of StockCharts.com


Conclusion

The markets are now in a technically defined short term down trend. A few more days of this kind of action will mean that we have entered an intermediate term down trend.

On a short term basis, it is extremely important to see how stocks finish. Every day that the market opens higher and ends up lower builds more doubt about whether prices can stay up.

The more that the buyers are beaten back, the lesser the chances of a real rally developing. And with the worsening technicals in this market, the chances for a resumption of the rally continue to get smaller.

This is no time to be making big bets, up or down.

Trading Plan Review

Important: Please Read. We have set up a special situation trade in our bond timing section. Please visit the page for more details. The trade should be put in place before the market closes on Thursday, as it is related to the employment report.

Our trading plan has served us well. We have been raising cash via our sell stops. Our few remaining long positions are still acting relatively well. But we have well placed sell stops under them.

We are hedged in stocks via the Short S & P 500 ETF. We will continue to manage each position individually regardless of the overall market trend.

Our energy portfolio is partially long . Our health care portfolio is partially long.

We are in cash in the gold market but have added a potential long entry. We are in a special situation trade in bonds right now. Visit our bond timing page for details.



Stock of The Day

Manpower Inc. (NYSE: MAN) Is Sending Out A Negative Economic Message

by Dr Joe Duarte

It's still three weeks before the next employment report. And if you think about it from an election standpoint, a sinificant number of voters will have cast their ballot before the report which will be released three days before the election.

The September jobs report was very controversial. But Manpower's shares performance after the report, is not controversial. In fact, it's quite definitive. The shares have fallen some 15%. That's not a resounding approval rating on the potential for an improvement in the jobs market.

To be sure, Manpower does a fair amount of business in Europe. And its falling price could be a reflection on what's happening in Europe where the economy continues to flounder.



Chart Courtesy of StockCharts.com


Our second chart, that of the prices of U.S. Treasury bonds (red) and the CRB index of commodities, is an interesting complement to Manpower's shares.

Bond prices were falling, with interest rates rising. But over the last week, bond prices turned around and began to rise. Bond prices rise when the markets feel that the economy is slowing down.

Now, consider this. The Federal Reserve and global central banks are printing money like there is no tomorrow. Stock and commodity prices are falling.

What's the message? It seems to us that Manpower's stock is telling us that things on the jobs front are not going well. Meanwhile, even as the central banks flood the world with money, the only asset class that is profiting from the printing presses is bonds.

That is a troubling message, no matter how you choose to frame it. Will it have an effect on the election? We think that it just may.



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