Monday, August 6, 2012

Trend Extrapolation in Politics

On Saturday, August 4, 2012, an event that is considered very significant from a socionomic perspective has taken place. Most people will not recognize the significance of the event as it will be seen as just one more day of speeches by politicians made in an effort to influence the November 2012 election.

One day after the jobs report was released for July 2012, Mitt Romney made a bullish comment on the job market, saying that "America is poised to take off economically". This event is in the same league as the Federal Reserve Chairman saying that "rates will remain low until 2014.". What we saw is politicians extrapolating a trend that has been unfolding for over 2 years. Politicians are always the last people to act on a trend, and for that matter, the last people to extrapolate a trend. When a trend becomes so obvious that it becomes intuitive even for politicians to extrapolate the trend, the trend has run its course -- in other words, it is a peaking signal at tops.

Here is a long term chart of the S&P 500, with the event labelled on the chart:

Notice when Mitt Romney made the statement about "America being poised to take off economically" -- it is very significant that the statement was made just as Minute wave [ii] up is about to wrap up to a close within the next few trading days, with Minute wave [iii] down of Minor wave C down (April / May 2012 - June 2013) to follow shortly afterwards. The event will indeed turn out to be a significant peaking signal from a socionomic perspective.

The rally also appears to be corrective with a lot of overlapping waves and appears to be forming a bear flag.

Here is a close up of Minute wave [ii] of Minor wave C down in the DJIA:

The chart illustrates how close we are to the end of the rally that started in June 4, 2012. The structure, of course, is a complex (zigzag - double zigzag - flat) structure. The last part of the structure is just about completed with a few more small sub-waves yet to unfold. The waterfall decline to follow should start some time this week.

There is much to be said about Mitt Romney extrapolating a trend that has been in play for over 2 years -- namely extrapolating the trend in the job market. There is a very strong tendency for people to "predict the present" and extrapolate the present into the future when the trend has played out for a sufficiently long time. This event is a peaking signal for the job creation trend as well, with the larger trend of job destruction soon to regain dominance in the job market within the next few months (definitely by the end of the year). With US ISM Manufacturing (officially) in decline for the second month in a row, and US Factory orders and car sales unexpectedly declining last month, there is strong evidence that the declining portion of the business cycle is starting to have an effect on the economy, bringing about the next leg down in "The Great Deflation".


  1. Hello,
    In the chart showing the downtrend lasting into Dec 2012, are the levels and timings just a guide or is that what you are expecting ?
    Thanks, DP

    1. As the chart suggests, a multi-month decline is expected with 1000 as the target for the S&P 500 by the end of the year. The decline should start some time this month.

  2. Hello Mr Bursch,
    Would appreciate your comments on S&P going down to 1000 by end of year in the face of QE3

    1. QE3 is definitely coming, but I expect the Federal Reserve to hold off on launching a third round of quantitative easing until they think that conditions call for it (see the earlier blog post "Business Cycle High Point Ahead" dated April 24, 2012).

      I expect the Federal Reserve to wait until the DJIA falls below 10,000 (which would be around SPX 1000) before launching QE3. I have the impression that the Federal Reserve is saving the last of their ammo for when they really need it. This puts the start of QE3 at December 2012 and continuing into 2013.

  3. Hello Mr Bursch,
    Was wondering if you are going to put up anything soon ? Always look forward to your comments ! The markets are giving no sign they want to go down and VIX is at the lowest level since March !
    Thanks, Dee