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http://www.joe-duarte.com
Will Significant Political Events Derail This Bull Market?
by Dr Joe Duarte
May 13, 2013
Steady Momentum Market Could Face Test From Washington Dramas
Suddenly the stock market has a whole new set of items to factor through. Among
them are when the Fed will start to raise interest rates and whether the IRS is
truly trying to become a security enforcement agency for the government.
What a couple of weeks we've had. On April 30, in this space, we penned an article titled "THE NEW NORMAL REDEFINED: ENTER THE POST-ENTITLEMENT ERA." The take home message was that the era of entitlements is over. The safety net is being pulled back. Disability, Medicare, Medicaid, unemployment and many other government handouts are going away, or at least will be cut back significantly.
The analysis was inspired by "The Twilight of Entitlement," and opinion piece penned by Robert Samuelson in the Washington Post. You can find the Samuelson article here. We dissected the article and noted a few things worth renoting, as they set up the rest of this analysis.
In our analysis we noted that "he total disconnect between reality and what people do with their lives," and "how many people can't seem to understand that the way that they go about what they do has consequences."
We also noted that "if enough people do less than smart things, eventually, these events add up and a big bad not so smart thing happens. That's how markets crash. That's why we had the subprime mortgage crisis. The mistake of the moment reached critical mass." Look at it this way. If you are practicing your golf swing and your technique is flawed, the more you swing the club the wrong way, the more your muscle memory ingrains the flawed swing into your game. What follows is that if your technique is flawed, your golf game will stink.
Samuelson noted: "entitlement has been slowly crumbling for decades. The Great Recession merely applied the decisive blow. We’re not entitled to many things: not to a dynamic economy; not to secure jobs; not to homeownership; not to ever-more protective government; not to fixed tax burdens; not to a college education. Sooner or later, the programs called “entitlements,” including Social Security, will be trimmed because they’re expensive and some recipients are less deserving than others."
He also noted: "The collision between present realities and past expectations helps explain the public’s extraordinary moodiness. The pandering to the middle class by both parties (and much of the media) represents one crude attempt to muffle the disappointment, a false reassurance that the pleasing past can be reclaimed. It can’t."
There are three key portions that are suddenly very biting. We are not entitled "to ever-more protective government; not to fixed tax burdens." The other one is his reference to the veil of "pandering" from Washington as a "crude attempt to muffle the disappointment" in the population over having lost the American Dream.
In our analysis we noted What Samuelson is saying is that there is a slow and steady recognition by the masses now, that something isn't right. Somewhere something went wrong. They haven't quite figured it all out yet. But they seem to be working on it. And, in our opinion, we may be one or two events from that fog clearing.
Enter the past week where the IRS confessed to targeting “political action type organizations involved in limiting/expanding Government, educating on the Constitution and Bill of Rights, social economic reform movement,” and groups whose names and activities included the word "tea party" or "patriot." Talk about not being entitled to "fixed tax burdens." Holy North Korea Batman!
In the same week, State Department officials, testifying in front of Congress laid bare the Benghazi attacks against the U.S. embassy in Lybia, describing a situation in which every principle that the U.S. was founded on seems to have been trampled in what may be eventually revealed as a political operation. How about this as a wake up call for the fading expectation of an "ever-more protective government." If the Benghazi facts are not reversed or convincingly clarified, it seems as if the U.S. government abandoned its citizens/employees in a hostile land, possibly trying to dampen down a potential controversy before a presidential election.
These are heady assumptions. And we know that it is still early in the process. But we suddenly have a significant set of developments that are starting to change the course of events in America, at a time when major forces on multiple levels, social, economic and demographic are coming to a head.
Are the the "one or two" events that we suggested would lead to an epiphany in the hearts and minds of the U.S. public? Is this the "Perfect Storm?" Or will these events, crucial as they clearly are to those who are used to a more fair and reasonable America, just be brushed under the carpet in the name of "progress?"
How will the markets react on Monday? Is this what Wall Street has been rallying over? Are the big money players sensing a significant and perhaps cataclysmic political event for a White House which has divided the country beyond the Bush dynamic?
Are we seeing the beginning of the end for President Obama? Or will this be a footnote and an eventual victory for the spinmeisters on Pennsylvannia Avenue, their K Street goons, and their bought and paid for mainstream media?
This is big. But the events are not as important as to how things end. If this blows away quietly it will send a clear message. Spin, politics, and self-interest have become the driving forces in American politics, beyond any period in modern history, even Watergate.
Perhaps the most interesting development is how Time's Joe Klein compared the current White House to the Nixon years. Perhaps it is a sign of things to come that Bill Krystol and Dennis Kucinnich, on Fox News together, agreed that this is bad.
What we are waiting for, more than anything else is how Main Street and Wall Street react to this. No matter how things turn out, what comes next will be the most important socioeconomic period in the history of America. It could be the beginning of the end or the start of a new positive period of some magnitude.
Time will tell. But, it won't be long now until this whole thing is decided. Pay attention.
The Markets
Chart Courtesy of StockCharts.com
The S & P 500 (SPX) ended last week on a very credible note. There is plenty of economic data this week which could move the market also. Retail sales kicks off the week. There are plenty of Fed speakers on the road. And there is lots of data from regional Fed banks to scour for information on the economy.
Inflation data and industrial production data is also due for release as well as consumer sentiment info. This should be an interesting week.
Chart Courtesy of StockCharts.com
The small stocks in the Russell 2000 Index (RUT) made a new high to end the week. This is a good sign as the S & P 500 made a slightly less convincing new high. That means that the broad market is starting to have days when it outperforms the large stocks. This is very bullish.
Chart Courtesy of StockCharts.com
The Nasdaq Advance Decline line (NAAD) continues to make new highs. This is very bullish also, as the new highs here are confirming new highs on the small stocks. This is a stronger market than meets the eye right now.
Chart Courtesy of StockCharts.com
The Nasdaq Hi-Lo Line (NAHL) also made a new high. This is a sign that momentum to the up side remains intact.
Conclusion
The technicals are strong for this market. But the politics are getting stranger by the minute. We'll see which way things break this week.
We continue trade the trend, which looks to have made a transition to the up side.
Trading Plan Review
The market remains on a momentum run until proven otherwise. We have adjusted accordingly, having slowly added to long positions over the last few days. We are adding more throughout the different sections on the web site.
Our S & P timing portfolio is long. This still remains a day by day trade. But it has more up side momentum.
Our energy portfolio is long. Our health care portfolio remains partially long.
We are in cash in gold and in bonds.
Stock of The Day
DB Agriculture ETF (NYSE: DBA) Fails To Catch A Bid
by Dr Joe Duarte
Shares of the DB Agriculture ETF (NYSE: DBA) continue to grind lower as grain
prices remain in down trend.
Chart Courtesy of StockCharts.com
DBA tracks corn, wheat, soybeans and sugar prices. Each commodity makes up 25% of the ETF. Ample supplies and somewhat lower demand have kept prices going lowr for some time.
The longest running bear trend is in sugar. Some are expecting prices to perk up in the commodities in the near future as the U.S. Dollar gyrates.
Chart Courtesy of StockCharts.com
Still, as the bigger picture chart of commodities (CRB, black line) compared to bonds shows, both are in down trends. This is pretty rare as bonds tend to move in the opposite direction of commodities.
Weather is still important. And with commodities, you have to keep in mind that South America is an important growing area for coffee and sugar as well as other commodities.
The reason we are writing about this is that so much money seems to be moving out of gold that it could also be having a negative effect on the commodities. A very wise trader told us a few weeks ago that his biggest worry is deflation these days.
If you look at the commodities you could make a case for that. But if you look at bonds, it's hard to agree. We don't know what to make of this. But it seemed worthwhile to point out as stock prices continue to rise and the Federal Reserve is starting to talk about ending the easy money cycle.
To subscribe to Dr Duarte's market Intelligence reports, which are emailed daily
"before the open" to subscribers, please visit our website at http://www.joe-duarte.com
Contact information:
email: support@joe-duarte.com
Phone: 434 823-8181
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