The Financial Markets Have Yet to Begin Factoring In What Lies Ahead

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The stock market may have found a temporary bottom as investors try to step away from the election and focus on the economy. The problem is that despite the election being over, the two dynamics are more interdependent now than they were before the Obama wins.

The really big picture is that daily life and the financial markets are now becoming one single entity. The days where markets were focused on factoring in the future are now past, at least for now. And making matters worse, we don't see any evidence that the market has quite caught up to reality fully yet.

What few seem to understand is that the United States is now a truly divided country. Republicans are not happy about the outcome of the election. They aren't sure why they lost, but they know that they lost because of something that they did. The question is whether they want to change their ways or dig in further while they try to convert larger numbers into joining their ranks, or whether they want to explore totally different avenues of adjusting to the new reality of their lives, higher taxes, government mandates, and a centrally run economy.

Interestingly, few Democrats are truly giddy. They won the election. But now they truly hold the country's future in their hands. A large portion of the public truly believes that Democrat policies will right the ship. They might. And yet they might not. So now it's all real. The pressure is really on. The Democrats are on their own. Few Republicans will help them. The divisions will widen.

The problem for the Democrats and for the Republicans is that things are now very messy. The proverbial Rubicon, ideologically and economically has been crossed, over and over again in the last eighteen months of campaigning. The consequences of all the awful things that were said, by both parties, during the election, and the policies that are in place, and that are coming, are starting to affect people's lives, and will continue to do so. Lots of businesses will be hit with the hidden taxes and fees in the Affordable Care Act and will have little choice than to reduce something, their workers, their product lines, their benefits, or their interest in staying in business. What many don't seem to understand is that the fallout from the election has yet to be felt. And that's mostly because people really don't know what lies ahead since the White House has been making moves well under the radar.

Thus, we are now nearing the impact phase. What lies ahead is the, thank goodness we did this, or the what have we done phase. Reality is about to set in.

We were in New Orleans over the weekend, attending an educational meeting of physicians from all over the United States. For the first time since we've gone to one of these meetings, even the liberal physicians from California sounded like Republicans. They were actually worried. They are concerned about their ability to make a living without having to close their private practice and go to work for a major corporate entity. Mr. Obama's name, as far as we heard, was never mentioned. The talk was all about consequences. Many are starting to wonder if they will be able to continue to practice medicine.

Don't think of these people as physicians. Think of them as small business people. They have offices, rent, staffs, and families. They have built individual practices over years and are starting to feel squeezed. Something will give. Now take that and spread it around to other businesses. The family owned car dealer, the dentist, the owner of three or four jewelry stores, and the Mom and Pop restaurant owners who are able to stay in business despite the constant threat of Darden, Brinker, and Cheesecake Factory.

If the West Coast physicians are starting to wonder about their future, it seems to us that anyone who owns a business is doing the same thing. To us that says that we have yet to see the response from the business community to the election outcome.

What does this have to do with the market? If we're right, we will start to see employment numbers start to falter, personal income getting lower, retail sales worsen, and GDP start to head lower. If we're wrong, and the election turns into a Clinton era boom, we would have no trouble with being wrong. We are for people doing well, no matter who is running the government. If taxes go up but the market triples in the next five years, it won't really make much of a difference to those of us who are traders and investors. We will do o.k. And more people will come back into the market and they will do o.k., until the bubble bursts. But, as we all known, it can take a long time for a bubble to burst. And those of us who are prudent can manage our resources, knowing that a day of reckoning will lie ahead for the reckless.

Here is where the market and the real world are coming together. We have yet to see anyone who owns a business be glad about the way things turned out in this election. So we expect things to muddle through for the rest of this year. But as 2013 unfolds and the implementation of the Obamacare laws and mandates start to hit home, we fully expect an interesting and perhaps an economically dangerous scenario to develop, unless there is something of equal magnitude to counter it.

What would make us change our mind? The development and rapid appearance of an intangible new trend. It would have to be something huge like the Internet, though. The iPhone 6 just isn't going to cut it. A new Android generation is a yawner in this context. And the expansion of Google's empire is a given but not a game changer. The new thing that would save the economy, if and when it comes, will have to be earth shattering. And the truth is, that we just don't see it. There is little evidence that any such new and era shaping technology, philosophy, or potential development is out there.

We are in the middle of a major social and demographic change away from what was once considered Mainstream to something different. This is big. This isn't just the culture wars. This is the turning of the Social Cycle. The Acquisitor Era has given way to the next stage, likely a Laborer era of some sort. Business people and intellectuals are being marginalized by a government whose only goal is its own existence. It won't take long before things change further.

Millions of people are thinking about this now. They are thinking about where they live and whether their belief system and their geography is compatible. At some point culture, tax policy, and religion will push people into making a move, away from their current home into a different state. Liberals in the South may move North or West, while conservatives in liberal areas may do the same in the opposite direction. This election was a really significant event. It affected people's lives at their very core. Things will change dramatically. The electoral map for the 2016 election will be significantly different.

The markets have not quite thought about this. And who can blame them? Markets are all about the next earnings report and the next piece of economic data. Trends are built on the stream of consciousness shaped by events. The events that will shape the next 10-15 years have been cued up but not unleashed yet. They are about to be unloaded onto the daily lives of everyone. Things will happen. The markets will respond. The drama will unfold. Atlas will shrug. There will be consequences. Chaos will melt into Disorder. And the Social Cycle will move onto to its next stop.

spx 9 nov 2012
Chart Courtesy of StockCharts.com

The S & P 500 (SPX) stopped its fall on Friday, at its 200-day moving average. That's a symbolic place to make a stand since it divides bull and bear markets. We'll see what happens here. In our opinion anything can be the next move. This remains a very uncertain period in history and the market has yet to fully reflect that.

rut 9 nov 2012
Chart Courtesy of StockCharts.com

The small stocks in the Russell 2000 index (RUT) also stopped falling, but closed below their 200-day moving average. A more critical support level for RUT is the 786 area. A break below that would be a more impressive signal that things could get a lot worse.

naad 9 nov 2012
Chart Courtesy of StockCharts.com

The broad market is in fairly bad shape. Both market breadth and momentum are wounded fairly significantly right now. That's the major reason why we are not totally excited about this bounce that seems to be materializing.

The Nasdaq Advance Decline line (NAAD) has been making lower lows and lower highs over the last few weeks. The new low on Thursday broke below the most recent low. And the bounce on Friday was not particularly impressive. This remains very worrisome.

Market momentum continues to get worse. The Nasdaq Hi-Lo line (NAHL) has turned lower. Thus, both market breadth and market momentum are now heading lower. Prices will almost certainly follow.

nahl 9 nov 2012
Chart Courtesy of StockCharts.com

Conclusion

Stocks bounced some on Friday. But the bounce was not particularly encouraging. We are at a very difficult place for investors at the moment as real life and the markets are starting to come together.

Stay patient. Don't make any big bets. Wait to see what happens.

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