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The current rally in the S & P 500 is headed for a
showdown with the recent failure point in the index at 1121. And the outcome
of the battle between the bulls, the bears, and this particular chart point
is the focal point between what's happening in the economy, the White House,
Main Street and the markets.
Chart Courtesy of StockCharts.com
The bulls seem to be trying it again, as the stock market has made a third
bottom since the month of May. Those who read this space on a frequent
basis know that we were among the first to notice that the S & P 500
made a “W” bottom in May. That technical formation looked promising, but
eventually failed on June 21st, as the S & P 500 reversed after reaching
1121 on an intraday basis. Since then the bears got the upper hand until
recently when the stock market bottomed again, now delivering a triple
bottom formation on the charts. It’s hard, but not impossible, for a market
to fail after making three bottoms in a relatively short period of time.
But, there is more to this story than just charts. There is something much different
going on here on a fundamental and political level. Much of the mainstream media’s
coverage of the recent market has been about economic worries leading investors
to stay away from the stock market. But if you dig deeper, there are two real
problems that have been driving this market, and they are related.
One is that the Bush tax cuts are set to expire in 2011. That means that on top
of the increase in red tape that will hit businesses from the so called health
care “reform” law, taxes will rise, on income, inheritances, and capital gains
on January 1, 2011. That means that even more money will come out of the pockets
of those people who still have jobs.
The second problem is that small investors don’t trust the stock market anymore.
That means that a steady source of liquidity has dried up. Small investors traditionally
put their money in mutual funds, and mutual fund managers, who tend to have no
sense of when to sell, would continue to buy stocks for extended periods of time,
leading to extended market advances.
The bottom line is that business owners, who also tend to be individual investors,
have two major factors aiming at them. One is the looming tax increases, and
the other is the thought that the stock market is no longer a good place to look
for above average returns on their money.
Now, think about this. There is a buzz building, at least in the “inside baseball”
political sites and blogs that the Obama White House is considering an extension
of the Bush tax cuts. To be sure, this is only a rumor. And if Obama’s past performance
is any hint of future performance, either this rumored tax cut extension won’t
happen, or it will be so watered down that it will benefit two or three people
in the whole country, just as the other so called “targeted tax cuts, tax credits,”
and other incentives that have been passed into law by the president and his
way out of touch staff and Congress.
In fact, the U.S. Chamber of Commerce, the Business Roundtable, and the National
Federation of Independent Businesses are hosting a conference in Washington D.C.,
and have penned an open letter to the president, in which they are specifically
asking "that the administration cut taxes, act on pledges to expand export markets,
and streamline government rules," according to a copy of the letter obtained
by The Wall Street Journal. The group told the Journal that they "are not going
to engage in a debate over whether the White House is pro- or anti-business.
We really want to talk about policy."
According to The Journal: 'In the letter, which was sent to the White House Tuesday,
the chamber says this Congress has passed $700 billion in tax increases, and
demands that all tax cuts passed in the previous decade be extended, including
those to individual, estate, capital gains and alternative minimum taxes. "In
one bold, swift move, this would substantially boost investor, business, and
consumer confidence," the letter reads.'
Conclusion
As the election nears, and the White House and Congress show no signs of an actual
understanding of how the world really works, business and political groups of
working people who pay taxes are starting to increase the pressure on the administration.
This is creating an interesting climate for investors, as the potential for success
could create a catalyst for higher stock prices.
Our hope is maybe, just maybe, the White House may blunder into doing the right
thing. If they do, we could see a nice rally in the stock market. In fact, what
you’re seeing now is money moving into stocks on the thought that the White House
has seen the light.
We think that it’s risky to bet on this White House to do something that the
market wants. But, it’s also true that they are losing their grip on power. So,
it may be early to get too excited. But we’re not discounting it altogether,
because it’s plausible, and because even this tone deaf White House wants to
win the mid-term election and to be re-elected. So, you have to weigh the odds
and act accordingly. That means that if an individual stock or an ETF starts
to show promise, this may be a good opportunity to test the waters, with a small
exposure, and with the consideration that it may turn out to be a short term
trade.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
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