The Social Cycle Has Turned; Charts Sending Out Warnings

The Three E's (Election, Economy, Europe) And The Charts. When Events And Markets Collide Things Tend To Happen.

Friday's employment report capped a disappointing week for the bulls as a nice move above key resistance levels for the S & P 500 got washed out in a fairy big way to end the week on a questionable note. Now, the markets have to deal with a new set of dynamics in Euro. In other words, the Three E's: Europe, the Election, and the Economy are back.

First, the economy. The employment report was disappointing. But it was not really a surprise. Most of the data that came in earlier in the week, the ADP jobs report and the employment reports in the ISM data that was released were softer than expected. But there were plenty of soft spots in the report that should be considered, although we doubt that anyone in office in Washington will actually pay any attention to the fine print. It's all about winning the election anyway.

Consider this, though. 812,000 people lost their full time jobs in the month and went to part time work. The total number of part time workers is at 7.9 million, although it's hard to know how many work part time by choice or by necessity. This goes along with the work week remaining unchanged and factory overtime only rising by 0.1 hour. The household survey showed that 342,000 fewer people feel themselves to be employed, which could be a more telling figure.

In other words, rising part time work, more people feeling unemployed, and slow growth overall is the take home message.

To be sure, the situation is significant. There are large numbers of people struggling to find jobs and make ends meet. There are jobs to be had. Just look around and you'll see "help wanted" ads. Many are at fast food shops and grocery stores. And many of them aren't better pay than getting a government check. But, fast food restaurants are more likely to be around in five years than bountiful government checks. So, as we've noted here ad nauseum, there is clearly a disconnect between expectations and reality.

Europe: The Social Cycle Has Turned

A new World Order is forming, and its calling card is Disorder. The big headline isn't that Sarkozy lost, it's that the so called "fringe" groups moved closer to power. In Greece Neo-Nazis won parliament seats. In Germany, Angela Merkel's party lost seats. And in France, the conservatives lost everything.

That move away from anything that was in office shows one thing; the people are fed up with what their leaders delivered, nothing, except maybe putting money into their own pockets. So, what we're seeing in Europe is a voter-box version of the so called Arab Spring. And if you've been following the news, the Arab Spring is a bloody mess, literally. Whether Europe's voter revolt will turn into its own war of guns and violence remains to be seen. But it's not out of the question.

What we're seeing is a classic transition from what Sarqar and Batra describe as an Acquisitor Age to a Laborer Stage in the Social Cycle. An Acquisitor Stage is one where the rulers covet money and nothing else and where wealth is so poorly distributed that society snaps. A Laborer Stage is one where disorder is the rule of the day and where economies struggle to meet the basic needs of the people. What follows a Laborer stage is usually a Warrior stage where the military takes over. Just look at Egypt for guidance on that front right now.

France just went from an acquisitor stage to what could be the begining of a Laborer stage. Greece has been in a Laborer stage for over a year. The U.S. seems to be in the death throes of its own Acquisitor stage.

The bottom line is that the Social Cycle is playing out in textbook fashion. Disorder rules before order returns.

The Election: Too Close To Call

Mitt Romney and President Obama are about to bludgeon one another. But fewer people seem to be buying into their rhetoric, which may mean that many have already made up their minds.

The polls say that Romney and Obama are neck and neck. The electoral college projections have it Obama's way right now. But there are lots of tossup states which means that things could still go either way.

What should be of concern to Mr. Obama is the fact that his crowds are dwindling. He launched his campaign at a half empty basketball arena at the Ohio State University this past week. That's not a great way to start things. His die hard core fans remain loyal. But beyond that, it's hard to tell.

Last week we noted that Mr. Obama's Intrade.com odds of winning the election were below 60%. We noted that it was the first time we had seen that. We checked in during the week and the odds had climbed back above 60%. But by Sunday night they were back at 59.5%. Rasmussen polls had Romney up 47 to 46% on Sunday. Gallup Tracking had Romney up 46 to 45% on Sunday as well.

The consensus on Real Clear Politics.com, covering polls from 4-11 to 5-5 had Obama up 46.6 to Romney's 43.3%.

The election remains too close to call, although it seems that Obama is starting to top out while Romney seems to be going nowhere.

The Markets: Volatility Is About To Rise Significantly

Chart Courtesy of StockCharts.com

The S & P 500 (SPX) took out three key support levels on Friday. The index closed below 1400, its 20-day and its 50-day moving averages. This seems as if its another down leg. But this is a crazy market. So the best we can do is watch and hedge our bets.

An important point to remember is that moving averages can act like rubber bands. When prices fall below or rise above them, reversing recent action, they often bounce right back in the original direction several times before the real directional trend becomes obvious. That means that we could see a positive close on Monday after all is said and done.

What we're saying is that it could be several more days before we actually know the way this whole thing is going to play out.

Chart Courtesy of StockCharts.com

Small stocks took a hit along with the large stocks. The Russell 2000 index (RUT) is now near its 200-day moving average. A move below this key long term support level could lead to more aggressive selling into the next few dys and weeks.

Chart Courtesy of StockCharts.com

The Nasdaq Advance Decline Line (NAAD) took a significant hit on Friday and now looks ready to test its recent lows. This indicator has been flashing trouble since April when it failed to make a new high after the major indexes did.

Chart Courtesy of StockCharts.com

The Nasdaq Hi-Lo line (NAHL), the key indicator at this point, may also be ready to roll over. A breakdown here would be very negative for the markets.

Conclusion

The market is likely to become very volatile over the next few days. It's hard to tell what kind of dynamic will develop. Events are now combining with chart breakdowns, which is a double negative. It is wise to be cautious and to be hedged as things develop.

The world is a disconnected place. There is no relationship between those in power anywhere and the majority of people whose major goal is to do the best that they can for themselves and their families.

We did find an interesting analysis that helped us understand this disconnect a bit more clearly. According to Scott Rasmussen there are two dynamics that are responsible for some of what we're seeing.

One is that the population in the United States is experiencing a world where "that is catering more and more to individual preferences. Everybody can buy an iPad, but every person customizes it in a different way." So while Americans are experiencing a large degree of individual freedoms as consumers, things are different as voters where they experience "a government that is unresponsive and catering to the interests and whims of politicians. Only 8 percent believe members of Congress listen to their constituents more than political party leaders. Only 17 percent believe the government today has the consent of the governed."

In essence, the system isn't broken, the government is. And the government doesn't really get it. Perhaps the most basic fact is that the public has the potential to be smarter than the government. Here's an interesting story we heard from a reliable source.

In some metropolitan areas, where there are areas of rising crime, and where it is often difficult to attract a police presence, crack houses seem to burn down with some frequency. That some of the neighbors that live next to the crack houses are seen wetting down their homes on the day before a crack house burns down may be coincident. To be sure, we have not verified this story. But the source is reliable. And we are not alleging anything beyond what we've said here. Nevertheless, if this is true, then it is a rather stark and Draconian solution to a problem. But it seems logical. And it is clearly market based. The government would never do anything that made that much sense. It would have to wade through mountains of red tape to reach agreement on anything, even as obvious as a crack house.

As Rasmussen describes, and we add, for better or for worse: "the American people are ready to move into a new era, and the political class remains committed to defending the status quo," where they live in luxury on the backs of the people's taxes. Rasmussen added: "Nothing will be resolved until the political class catches up to the American people. That will require a major change in the way government and politics work."

There are no signs that this is anywhere in the near horizon.