The summer trading season is here and we are 4 months away from the election. Make no mistake; this election will be tied to the fortunes of the stock market. If Friday was any indication, Mr. Obama didn’t get off to a good start. With a jobs number at +80K, we should be grateful it wasn’t worse. However, when it comes to the worlds of finance and politics hardly measures up to anything that promotes confidence.
By this time in the season, the challenger ought to provoke confidence in the electorate if he’s going to win. By July 1980 we knew Reagan was going to win. By this time in 1976 the country even had a feeling they were going to elect Jimmy Carter. Most challengers who end up winning already sport some charisma they have a solution by this time. Without me answering for you, do you have that feeling about Romney?
There’s a specific reason I bring this up. We may very well have seen a high in the market this week. In terms of the Dow it was 45 days off its peak and in terms of the rest of the market very close to 90 days. It seemed that markets were looking for an excuse to sell just after the point in time they took out their June 21 time window highs. By itself that would be an incredibly bullish sign. But they couldn’t hold it.
So here’s what happened in the past week or so. First of all, bears covered the news out of the EU Summit as the announcement came for a mechanism to allow banks to borrow or be bailed out without the funds having to sit on a national balance sheet. It’s the kind of magic with a pencil any politician could love. Once again bears proved they were non-committed in the bigger picture and willing to give up near the same levels as last year when Greece didn’t turn out to be the end of the Euro.
Next up was the ISM number which came in below 50, not a good sign. This time traders did not sell as the market climbed that day. They buy American bad news while sell European bad news? That’s odd but it is what it is. The next turn came once again in Europe as the ECB cut interest rates but hit investors right between the eyes of how sour the economic climate really is in Europe. What usually provokes a bullish response (a rate cut) instead produced the opposite which meant the attitude towards Europe was really dysfunctional. The next event was likely to tip the scales one way or the other.
Before we get into that markets were dealing with a VIX that was already well below 20. That means one of two things. Either the market was ready to peak because we all know a VIX so low can’t sustain a big move or there was something incredibly more sinister developing. This is 2012 and like 2007 we have a major time window looking in the fall. Not only will we have the 5 year anniversary of the top in 07 which is the 262 window from that peak but we also have the 10 year anniversary looming of the 2002 Internet bubble bottom. This is a very rare event given a bull and bear market ended at exactly the same time in the calendar. What if the VIX continues to drop? That would mean we could have a major top if the market were to continue the rally. It’s personally an event I wouldn’t wish on the market. Far more preferable is an inversion low close to this time window which could spawn an incredible leg up.
It’s not what the news event is that’s important, rather the reaction to it. We could’ve had a really bad number and had the same reaction as the ISM, which would mean confidence is brewing. We could’ve had a really good number and bought it which meant confidence was climbing or we could’ve sold a really good number which meant confidence was peaking. Instead, traders reversed their stance from the ISM and decided to be in a really sour mood on a singular number that really wasn’t so bad but taken in the context of the political season is really terrible.
The fact of the matter is the number should be around +250K every single month at this stage of the election cycle. As I spun the dish on the Sunday programs even Romney supporters are waiting on his plan other than repealing Obamacare to restore confidence.
The market is losing confidence or it wouldn’t have sold. The key problem now is the US Dollar which rose from the dead to create a new high since the symmetry in June turned it back up. It’s a very strange chart as the pattern bottomed at 79 days after an original low of 78.55 giving us some great symmetry. In these situations the price action normally shoots beyond even the most optimistic projections. Instead it dropped, threatened to breakdown as equities pierced beyond June 21st and wouldn’t budge one penny lower. Instead it broke past first resistance and currently resides right where I thought it would be when I looked at the chart a couple of weeks ago.
Next page: What to expect in the euro
Here’s what I think is going to happen, finally. The EUR-USD needs to test that 1.2000 level and get it over with already. It’s an inevitable test the market keeps procrastinating. Maybe bears are truly afraid of holding on to see that test. Can it be that bears are so non committed they don’t even have the nerve to hold on for a test of key support? It sounds strange but this is a test that is a long time in coming. For once and for all, I think the market needs this test to know where they are in relation to the European crisis. If it holds, markets can reverse and go back to the highs again. If it doesn’t hold, well then, the chips will fall where they may. The Dollar has much longer term resistance up near the 86 level. As you can see from the long term chart there are 3 different channel lines just overhead. That’s part of the Euro 1.2000 test. What happens there will go a long way to determining not only how the rest of the year goes but could determine the Presidential election as well.
By the way, while we are talking about candidates creating a confidence buzz, the Dow bottomed the week of MARCH 28 in 1980 and stayed up through the entire election season. We haven’t heard the comparisons to Jimmy Carter in a long time. I might be wrong about this but I think this is the first President who truly has been compared to Carter. If that’s the case, the challenger is hardly Ronald Reagan because if he was the stock market would’ve taken a much greater liking to him by now.
Click chart to enlarge