World At Apparent Stall: The Big Stalemate

When The Trend Breaks Out It Will Be A Huge Move

The world, the markets, the polls, and life in general seems to be at a stalemate. That means that when the world decides on its next course of action, the move will be huge and will likely last for a long time.

The U.S. presidential election polls tell the tale of the tape as well as anything, right now. Sure, there are some polls that give Mr. Obama a nice lead. But few really believe that as the more reliable Gallup and Rasmussen polls are calling it straight even.

The polls that give Mr. Obama a big lead seem to have some statistical issues that are leading to that conclusion. There have been reports of significant sampling bias which have skewed the number of participants in the polls toward Democrats. And the formulas being used to smooth out the results are being overweighted toward the prior election, which had abnormally high Democrat turnout. So while Mr. Obama may still win the election, current polls should be looked at with some skepticism.

That being said, the markets seem to have it right. All the major charts are pointing to equilibrium as the dominant decision being taken by traders. What this tells us is that now that the Fed has eased, the market has one less thing to ponder.

Europe remains dicey, and so does the global economy. But the flushing of easy money into the environment should be a positive for the next few weeks, at least until the election. Events in the Middle East are also worrisome, to say the least. Clearly, foreign policy is increasing as a potential factor, not just on the election, but also in the way the economy works its way out of its current status.

But the take home message is that now that the Fed has eases, this buys the markets time to wait and see how the election plays out.

The S&P 500 (SPX) had five consolidation days after breaking out on 9-13 and 9-14. This is bullish because the market is following some excellent technical guidelines appropriately.

First, the index closed above its upper Bollinger Band on 9-14 and immediately moved back inside the bands over the next couple of days. This is a sign that the market is functioning appropriately. It's a sign that traders are still harboring some caution. If things were getting out of control the market would have kept on rising, outside the bands. That would have led to a more violent correction and could have killed the rally in a few days.

Instead, things are acting in a more orderly fashion, which means that the rally could last much longer. And if history is correct, we will see a breakout to the up side, as the election nears, since that is the most common seasonal tendency for the last two months before a presidential election takes place.

Chart Courtesy of StockCharts.com

The Russell 2000 Index (RUT) of small stocks is lagging a bit behind the big cap stocks. But it's not a major divergence. Like with the S & P 500, small stock investors are not going crazy over the top bullish. That's a good sign here as well.

Chart Courtesy of StockCharts.com

The market's breadth is also acting well. As the indexes went sideways, the Nasdaq Advance Decline line pulled back. But the line only fell as far as its previous high before turning higher on Friday. Thus, the higher high and higher low bullish pattern has been preserved.

Chart Courtesy of StockCharts.com

The Nasdaq Hi-lo line (NAHL) made another new high on Friday. This remains a positive as it indicates that money continues to move into stocks. Momentum in this market remains to the up side.

Chart Courtesy of StockCharts.com

Conclusion

The market and life in general remains in consolidation mode. Consolidations precede decisive moves, up or down.

To us, the action in the market, and the action in the polls, suggest that at some point, a big decision will be made.

Thus, we would expect either Mr. Obama or Mr. Romney to start pulling ahead of the other within the next couple of weeks or so. When that happens, the markets are also likely to make their decision.

It's hard to speculate what the combination will be, Romney up or down, Obama up or down, and markets up or down. But it looks as if the polls and the markets are now moving in lockstep.

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