Think Big: What Happens After the Elections?

We expect a stock market rally into the election. That's almost a given, especially as central banks flood the world with money again. But, beyond the short term, it's a whole new ball game waiting in the wings.

The markets and the polls pretty much followed their expected scripts last week. Mr. Obama got his post convention bounce and the stock market rallied on the ECB's hardly surprising move to buy bonds and thus inject newly printed money into the European financial system.

That's good for the next week or so. Now, the Federal Reserve has to deliver on its implied promise to print money and the election has to take some kind of more predictable road to its conclusion. The latter, we suspect, will be the bumpier of the two dynamics, as the polarized media's slant on the election, and the public's inability or unwillingness to dig for facts and make their own decisions will likely be what influences the outcome the most.

The U.S. is so polarized that, in our opinion, most people have already decided who they want to the next president. What that means is that voter turnout will likely be the deciding factor, barring something very dramatic happening from now until the election. What is obvious is that joblessness and a poor recovery mean little to the Democrats while the Republicans are rabid about getting Mr. Obama out of office and little else. There is no common ground between the parties, and their partisans. America is now two nations, those for Mr. Obama, and those who want him out of office.

The problem is that no one seems to have a plan for the day after the election. Oh, sure, they've talked about things. But, really, none of these guys, Obama, Romney, or anyone of them, have a clue as to what will happen when the votes are counted.

What is certain is that at the epicenter of what lies ahead is the concept of more versus less government, and the potential abolition of over 200 years of legal and behavioral precedents. If Obama wins, it's full steam ahead with more of what is already ongoing. If Romney wins, it's an even bigger black box. Either way, it won't be easy. There will be opposition of significant and forceful magnitude. There has to be when 45% of the country is routinely for one guy and 45% of the country is routinely for the other guy, give or take 3-5 points on either side. The other 10% of the people will never make up their mind. And half of them will go along while the other half will complain.

So where does that leave the markets? For one that's a lot to price in, a major change in a macro-secular dynamic, the American way of life. It's clear that this is one electiOn that is likely to redefine a society in a big way. And not just any society, but the society that has led the world, economically and ideologically since 1945.

That means that the 1960s may look tame compared to what could lie ahead, especially if the rising sales of guns is any sign of what the general population is thinking.

We don't want to sound alarming. And we are not turning toward those who are predicting the Apocalypse. But history does suggest that the Social Cycle eventually turns. And what follows an Acquisitor Society, where financiers who love money for the sake of having money, rule, is a Laborer Society where those with lesser skills and those more prone to violence rule. This is clear to anyone who has watched The Arab Spring. It can happen anywhere. And it could happen in the U.S. It's the normal progression of the Social Cycle, when the rubber band snaps as too much money ends up in the hands of too few.

What does that mean to the average person? It means that awareness of what is happening is of the utmost importance. Does that mean that you go out and buy groceries, bullets, and gasoline while you start to dig your shelter in the back yard? That's a tough call and one that should be taken up by each person based on their conclusion. That's not our goal in writing this analysis. Our goal is to go where the mainstream media and its spin doctors won't go, the real issues and the very real consequences of what's about to happen.

What is developoing is that as polarization becomes increasingly extreme, the chances of agreement shrink proportionately. And at this point, no one is willing to make any kind of compromise. Meanwhile, the clock is ticking on the U.S. sovereign debt, the U.S. healthcare system, and the global security apparatus. Yes, if the Fed floors the money printing gas pedal, the stock market is likely to rally, perhaps even into November. That's a traditional and reliable seasonal pattern. And it's one on which all traders and investors should consider taking a chance.

But easy money won't create jobs unless there is meaningful change on the fiscal and political sides of the equation. Those with means will just invest and sit on their profits while those who can't invest will wonder what happened to their expected improvement and become angrier. The left will blame the right, and the right will point fingers and badmouth the left. The rest of us, those who work and foot the bill, will be nowhere.

We're thinking about what follows the election. We're thinking about the fiscal cliff, if it remains unsolved or the draconian, accross the board cuts go into effect. We're thinking about the Affordable Care Act and its redistribution of government money away from doctors and into the hands of hospitals and corporate medicine. We're thinking about the defense cuts and America's military being spread all over the world with fewer resources at their disposal. And we're concerned about the rising Medicare premiums that few are aware of and that are on their way for the next two years.

And frighteningly, we're thinking about a country where large numbers of people function because the government pays for their pain, anxiety, and depression pills, and the fact that the government is already limiting the number of medications and the number of pills per prescription that they will pay for, shifting the costs to those who already live off of what will be a shrinking government paycheck.

The markets, and the general population, don't think about these things until they explode in their faces. They are unthinkable to most. But that's what's waiting to happen if Republicans and Democrats can't figure out how to stop the freight train that is reaching critical speed and running out of track at the same time.

That's why this election is going to change everything. At the end of the day, those who were forewarned could make the best available choices from an array of extremely difficult possibilities.

The Markets

The S & P 500 (SPX) delivered a nice breakout last week. The magnitude of the move was correctly predicted by the shrinking Bollinger Bands over the days that preceded the rally. The index now looks ready to start moving along the upper Bollinger Band, although it may pause to catch its breadth in the next couple of days.

Chart Courtesy of StockCharts.com

We continue to note that in the fourth year of the Presidential Cycle, the tendency is for stocks to rally, often in a big way, for the final two months before the election. Often, this rally is aided, as it may be this time, by easing of monetary policy from the Federal Reserve.

Chart Courtesy of StockCharts.com

The Russell 2000 (RUT) index of small stocks is confirming the up move in the large stocks. This is a positive for the overall market.

The market's breadth continues to improve. The Nasdaq Advance Decline line delivered a nice upward thrust for the past two trading sessions. This is exactly the kind of action you want to see.

Chart Courtesy of StockCharts.com

The Nasdaq Hi-lo line (NAHL) continues to show that upward momentum has returned to this market. This has been a very reliable indicator in the past twelve months.

Chart Courtesy of StockCharts.com

Conclusion

The stock market is likely to move higher over the next couple of months. What happens beyond that is likely to be significantly impacted by the outcome of the election and the direction that the U.S. takes after that.

We will continue to monitor social and economic trends, indicators, and continue to analyze the markets on a daily basis in order to stay with the overwhelming direction of prices.

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