The Butterfly Effect: Events Have Passed The Point Of No Return


by Dr Joe Duarte
October 22, 2012

People Act Because Their Guts And Their Lizard Brains Sense Danger

The stock market took a beating on Friday, the anniversary of the Crash of 1987. Now, investors have a whole lot more to worry about. The fact is that whether anyone whats to admit it or not, many seemingly unconnected events are past the point of no return. The situation in the world looks headed for significant developments that could take months or longer to be fully realized and to become fully apparent. But it's clear that, barring some kind of magical event, or divine intervention, events are racing toward a major transition to the next level of political, economic, and even military situations.

This is a time when the interaction between the charts and the headlines becomes crucial. As the U.S. election nears, and the situation in the Middle East becomes grimmer, it's easy to forget Europe and the Economy. But, unfortunately, it's all coming together at once. Everything now matters. And everything is now part of the whole. History shows that when critical mass is reached, events take on a life of their own. We are now at that point. The Social Cycle has turned and the train is well out of the station. There is no going back.

On September 14, 2012, we penned an analysis titled: "The Butterfly Effect: Empty Chairs. Mother Teresa. Beyond The Realms Of Spin." You can find it here.

The major premise of the analysis was that something had changed in the way people were acting, and perhaps in how they were planning to act in the future. It was as if a collective milestone of some sort had been passed by a group of people, who may have represented a larger demographic. We had several different vignettes in the analysis. And one is particularly poignant.

With regard to that intangible something in the air, we noted, in response to Clint Eastwood's "empty chair": "The mainstream media decided that Mr. Eastwood was crazy. Turn the page. On with the next story. Let's sell some papers. Yet, they might not have noticed the reception that his "empty chair" monologue got from the crowd in the hall. It was the kind of crowd response you get at a rock concert. It was surreal, disturbing, thought provoking, and symbolic. It was unexpected. And it hit home. As we watched, we wondered if this wasn't a turning point for the election. It's still early. But things, suddenly feel different."

But the "empty chair" did resonate with people, even if only at a subliminal level. People were ready for such a development. And, in our opinion, it changed everything.

Here is what we mean. In the "butterfly" article, we also wrote about a friend who was doing volunteer work with Mother Teresa's order in South Dallas. Our friend took one of the order's sisters to the county hospital to visit a sick parishioner. We wrote: "Our friend told us an interesting story. People of all races, creeds, professional standing, and color were coming up to the sister, praising her, and asking for her blessings and prayers. Our friend described the situation as one in which it wasn't one or two people who approached the sister. It was many people, throughout the hospital as she moved through the facility. These are Catholic nuns, dressed in white with blue fringe, usually diminutive, unassuming, and hard working women of small stature and frail looking frames. Yet, they have something. They have power. The power of unshakeable belief and Faith; the will to fight for good until there is nothing left. And then they get up and fight again. And people can recognize it. To stand in their presence is to behold something beyond politics. And people can feel it."

Our point is that some things transcend politics. Call it what you will. But at some level, people's guts connect with that unseen force and what is described as the lizard brain takes over. The lizard brain is that part of the brain which is all about fight or flight. It knows no reason. It only knows instinct. It senses danger. It intuitively knows when survival is all that matters. And to us, it looks as if Clint Eastwood's "empty chair"connected with people's instincts, just as the frail nuns are a symbol of hope and strength and people can sense it regardless of what else they may believe.

To us, the most interesting part of the story was this. In a nation where an entire political convention was divided on whether the word "God" should be included in the party's platform, according to our friend: "No one objected when the sister obligued the requests of those who approached her by reciting the Lord's Prayer in the halls of the hospital. Some joined in the prayer." This is where "empty chairs" work, at that level of connection that is beyond reason. And after that moment of recognition in people's core, the cognitive brain begins to add layers of complexity and thought to that initial jolt.

So, if we believe the mainstream media, Clint Eastwood was crazy, and Faith is no longer a part of the American culture. Yet, to us, out here, where people actually live and breathe outside of the Beltway and the fantasy world of the networks, things seem different. Clint Eastwood seems to have made people look around and think. And, when everything else fails, maybe a little faith might work. Our point is that if you look at things with the hope of figuring things out you may see different than if you look at things with preconceived notions. What you want to see and what you see aren't always the same thing. If you let your gut tell your brain what it thinks, you may be surprised by how things turn out.

Our friend was telling us that last week, during the sister's weekly food distribution, so many families came to request aid that for the first time in the parish's history, that they ran out of food and had to turn people away. This is remarkable. The politicians in power and the statistics tell us that things are improving. Yet, on the ground, in the trenches, things seem different. It's the people from the trenches that vote. It's in the trenches, in the parishes where hunger is addressed that people make decisions. It's at that most basic level that the gut and the lizard brain rule.

The mainstream polls have shifted too. Rasmussen Reports took a lot of heat for calling a tight race for a long time. We took a lot of heat for reporting Rasmussen's poll results. Rasmussen had been polling likely voters all along, and adjusting voter tendencies to account for the 2008 election's unusual turnout. Now, most of the polls, of likely voters, are mirroring Rasmussen. The race is a dead heat, with Romney having the momentum, at least until the third debate. Debates, the mainstream media tells us, don't matter. The mainstream media doesn't understand hunger, pain, poverty or the power of the lizard brain and faith.

And if you look at the market charts, at the daily trading patterns, and the worried faces of the people who trade for a living, you can see something different than what the hucksters that hawk buy and hold strategies for big brokerages try to pass off as "corrections" and "long term buying opportunities." You can see fear. Fear comes from the gut and the lizard brain. The gut and the lizard brain are all about survival. They lead to action.

There is something wrong with this stock market. It's not right. The volatility and the strange things that go on are just not right. High frequency trading, dark pools, and who knows what else is lurking beneath the surface of every tick. Derivatives are likely to be running amok off the books again. Charts tell us what happened, but often don't tell us what may happen. It's truly scary, even for a 25 year veteran trader who has lived through every single crash since 1987.

To be sure, some things are still reliable. Last week, on Friday, we noted that the Nasdaq Advance Decline line (NAAD) had been making lower highs and lower lows. We noted that although the line was trying to recover, it never quite did recover in any kind of convincing fashion. That proved to be prescient, as Friday's trading moved the line to yet another new low, once again accentuating the lower high lower low trading pattern. This is a big negative and given Friday's market decline, is a sign that this market is now much weaker than the indexes are telling us.

Chart Courtesy of

The S & P 500 (SPX) fell back to its 50-day moving average. But it has now made a clearly visible triple top. This could be an extension of the current trading range, or the beginning of yet another slide to the lower end of the recent range with the bottom near 1422.

It really doesn't matter so much what the S & P 500 is doing at this point, though, unless you are trading the S & P 500 via stock index futures or index ETFs. The rest of the market is very weak. Just look at the Nasdaq Advance Decline line, above.

If you own mutual funds, or are trading individual stocks, the odds that you will lose some money in the short to intermediate term have risen.

Chart Courtesy of

The small stocks in the Russell 2000 index (RUT) are no help at all. Their activity, in fact, supports and corroborates what we are seeing in the Nasdaq Advance Decline line, weakness. A good market has more stocks advancing than declining. A good market has good participation from the small stocks. This one, barring a major change, has neither. All of this could change in a couple of days. But as this writing, it does not.

Chart Courtesy of

Market momentum is also sluggish. The Nasdaq Hi-Lo line (NAHL) is struggling. It had tried to recover over the last week. But on Friday, it also rolled over. This indicator, though, can take a lot longer to turn negative than the advance decline line. So, it is a lagging indicator, especially when the market turns to the down side.

Chart Courtesy of


The stock market and the real world are in synch. Charts and events are starting to agree. That is a significant set of developments and one that could change the markets, and the world in the foreseeable future.

We expect the next few weeks to full of major announcements and events as all sides begin to make their moves toward what they will do after the election.

The disconnect between the political class, the mainstream media, and the real world is at its greatest point ever. Those in power and their chroniclers have no idea as to what people's guts are telling them.

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

Trading Plan Review

Important: Please Read. Our special situation bond trade is now net short.

Our trading plan is still working. We have raised some cash. We still have long positions that are acting 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 short bonds.

By the time the election rolls around, we would not be suprised if were 100% in cash.

Stock of The Day

U.S. Gasoline Fund (NYSE: UGA) Makes Another New Low

by Dr Joe Duarte

Shares of the U.S. Gasoline Fund (NYSE: UGA) broke down last week. The real issue is whether there will be a bounce or if this is going to be in place for a while.

Chart Courtesy of

If gasoline prices continue to fall precipitously then we are in a truly significant moment. The questions are plentiful. And the all have to do with the economy.

What do low gasoline prices say about people's driving habits? On the surface you have to consider the notion that the large number of unemployed people may be making a dent on driving demand for gasoline. But you also have to wonder, if that's the case, have people just given up?

If people have just given up then you have to consider the political implications of such a development for the election. People that have given up hope of finding a job may look to change the leadership in Congress and in the White House.

On a more positive side of the ledger, lower gasoline prices have traditionally meant that people have more disposable income. Traditionally, one of the biggest beneficiaries of lower gasoline prices have been the casual restaurant chains. We'll be watching the effect of lower gas prices on those stocks.

Finally, it's important to consider that low gasoline demand could be a harbinger for falling commodity prices all around. Gasoline, may indeed be a canary in the coal mine for the overall commodity markets. We'll be watching this very carefully.

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