Stock market sees technical, fundamental divergence

Stocks up but economy down...

Stock index, chart, technical analysis Stock index, chart, technical analysis

There is a major divergence going on. How could the stock market be back at the highs with GDP at 1.5%? Somehow, this doesn’t make sense. It doesn't feel like markets are at significant highs. Here’s what that really means: The market has potential to be a lot higher, thousands of points higher. I’d say we are climbing a wall of worry but the VIX broke under 15, so there isn’t too much to worry about. It’s possible we can get hit with a massive pullback that would spike the VIX, but at the rate we are going, it could be too late for Romney.

If Obama's lead gets any larger, Romney can only win if the market tanks and at this stage of the game is playing from behind. He has to catch up before he can go ahead. That will tell you the kind of weakness we have in this election because most Presidential reelection bids will fail with this kind of economic performance. Obama has been compared to Jimmy Carter and if that’s really the case Romney should be blowing him out by now. But he’s not.

So, enter Paul Ryan, who some have compared to a young Ronald Reagan. That would be true but he might not carry the same message. I’m not sure that a message of budget cuts, which really amounts to Austerity 2.0, can be compared to Reagan’s shining city on a hill. Still, we’ll stick to our guns and suggest the winner of this election is going to hugely impacted by the fortunes of the stock market over the next two months.

This is August. It’s a slow month, as vacations peak and then wind down for Labor Day as kids go back to school. Looking at the year to date, we anticipated the rally in the early part, the turn in March, but I suppose if anything I am a little surprised the market would be as high as it is right in the middle of the summer. It’s a good thing given where we were a year ago at this time. In case you forgot it was the epicenter of the debt ceiling debacle. Who was front and center for that turn of events? You got it, none other than Paul Ryan. From what I’ve seen, I don’t think the market cares too much for Obamacare. What I am curious about is to see how the market responds in the early part of the week and if sentiment sways one way or another now that the battle has been joined. If anything, from what I see in early Sunday action, perhaps not.

Technically, you need to continue watching the dollar, as it continues to test a series of trendlines this week. Last Monday the trendline holding the lows caught the drop but action fell no further. Given a massive drop into the support zone, it opened the door for an action reaction sequence that would go straight back up to the prior high. If this truly was last year, it might have done so already. Thankfully, the Dow is really not up 300 one day, down 300 the next. But in our studies of pivots, we know that in many instances a move off the low will challenge a near-term high on the way down.

But what if there is no near term pivot close by? Then what happens? We probably have to look to internal Fibonacci relationships in the leg or see if a near-term trendline will catch the action. That appears to be what happened here. In our chart of the week, the small rise in the Greenback was captured by the downward sloping trendline connecting the highs on July 26 and Aug. 2. Now we see the potential for some congestion before it breaks one way or the other.

Next page: The bigger picture...and the threat of war

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