A Runoff Election in France

As a preview to the main attraction in the United States in November 2012, a runoff election is scheduled to take place in France on May 6, 2012 in which Sarkozy (the incumbent) will square off against Hollande (the challenger) for the position of President. Sarkozy has been president of France since 2007.

The reason why the runoff election in France is important is that it provides potential clues (from a socionomic perspective) to how the November 2012 election in the United States will play out. On May 6, 2012, we will be approaching a business cycle high point -- which means that the intermediate term trend in social mood is still bullish, while social mood is expected to become increasingly bearish in the second half of 2012.

Here is an updated chart of the CAC-40, which reflects the social mood in France:

As the updated chart shows, the CAC-40 is tracing out an regular flat for Supercycle wave (a) as per the main wave count with Cycle waves a and b complete and the first two subwaves of Cycle wave c completed with Primary wave [3] down in progress. While the DJIA took out the May 2011 high, the CAC-40 is still well short of doing so, indicating that the rally from the October 2011 low is a bear market rally, namely Minor wave 2 of Intermediate wave (1) of Primary wave [3] down, in which there was a standard 61.8% retracement of Minor wave 1 down. In addition, Minor wave 2 unfolded as a 5-3-5 zigzag. From the peak of Minor wave 2 up, the CAC-40 has given back a substantial portion of the gains in a five wave decline (Minuette wave (i) down) that is close to completion. The CAC-40 should get a bounce (Minuette wave (ii) up) with a rally up to around 3500 in June 2012 before resuming the larger downtrend (Minor wave 3 down).

The top election issues in France are the same as in the United States: the economy and jobs. While Sarkozy finished the first round in second place with 25% of the vote behind Hollande (28% of the vote), there are still a lot of votes up for grabs in the runoff election on May 6, 2012. It will be a very close election -- the CAC-40 is still early enough in Primary wave [3] down that Sarkozy should still be able to win re-election --- but it will be a very tough fight to the finish.

So far, social mood has held up better in the United States (as indicated by the DJIA) than it has in France (as indicated by the CAC-40). A Sarkozy win in France would therefore bode well for Obama winning re-election in November 2012 from the perspective of the socionomic perspective. How the runoff election on May 6, 2012 is therefore a very important indication of social mood in the western world.

European Debt Contagion Infecting the Core

The European sovereign debt crisis continues to unfold with the contagion starting to affect even the core European Union nations. The GDP of the European Union is now falling again even in nominal terms. Several days ago, the latest GDP numbers for Germany were released, showing that the nation's GDP declined even in nominal terms, along with Spain, Slovenia, and the UK.  The European Union is also bleeding jobs again with rapidly rising unemployment in most of the peripheral nations in Europe, as well as a decline in manufacturing and factory orders even in Germany.

In the latest series of developments, Standard and Poors downgraded the credit rating of France and eight other European nations. A short time later, the Euro Zone bailout fund was downgraded from AAA to AA+. This is a very clear indication that the sovereign debt crisis in Europe is now infecting the core European Union nations.

Portugal is now following Greece on the road to an eventual default on its debt after having its credit rating downgraded to junk status by all three credit rating agencies, with Spain following close behind. Even as a Greek default looms in the intermediate-term horizon, economists and analysts remain steadfast on their optimistic outlook on the European economy, most dramatically demonstrated by the interview involving the Greek Prime Minister on CNBC.

There are a number of other developments in Europe showing the effects of a spreading debt contagion with even the core nations affected:

1 -- The latest poll is showing that 65% of people in Italy have an unfavorable view of the euro with a substantial portion of the population preferring a return to the lira. This underscores a social trend associated with bear markets, namely the tendency for people to identify with smaller social units.

2 -- The austerity trend in Europe is unfolding in full force even in France and Germany as their governments move to tighten their belts with higher taxes and spending cuts. The social trend of increasing conservatism has continued to increase in Europe, with Greece and Portugal the first nations to implement austerity measures (as they were the first to be affected by the debt crisis) with Spain, Ireland, and Italy following suit. This underscores another bear market trait, namely, increasing conservatism as bearish social mood increases.

3 -- Europe's $39 trillion pension bomb is on the verge of going critical, if it hasn't done so already.

In the western world, the effects of "The Great Deflation" are stronger in Europe than they are in the United States and Canada. In many ways, the developments in the western world are a parallel of the 1930s when Germany defaulting on its debt in 1930 marked the beginning of the third phase of the Great Depression. We are on that path again, and at the present time, the United States is the only developed nation on the planet that is still creating jobs. As with the 1930s, Europe is poised to lead the way into the heart of the abyss with the United States and Canada following suit a few weeks to a few months later as the worst part of "the Great Deflation" unfolds.

Social mood is also deteriorating faster in Europe than it is in the United States as the updated charts of the DAX, FTSE, and the CAC-40 illustrate. The DJIA and the S&P 500 have exceeded the late October 2011 highs, but the DAX, CAC-40, and the FTSE are still below the October 2011 highs, setting up an intra-market bearish divergence.

FTSE:

CAC-40:

DAX:

Social mood in France and Germany has been deteriorating faster than expected -- both indexes are tracing out a truncated C wave within a zigzag in the form of an ending diagonal. If the wave counts for the DAX and CAC-40 are correct, it is a very bearish development as C waves within zigzags almost never truncate, and it is a harbinger of a third wave unfolding as a very fast decline. This is something to really keep an eye on in light of all the economic and political events unfolding in Europe.

Santa Claus Rally in Sight

A Santa-Claus rally, which is the third and final phase of the three month long reprieve period known as Minor wave 2 up, is on the short-term horizon. This is an update to an earlier blog entry in which a case was made for the rally in October 2011 being just the first part of Minor wave 2 up on the basis that it is all the same market in a deflationary scenario as proposed by Elliott Wave International several years ago.

Here are the updated charts of the DAX and the CAC-40.

DAX:

CAC-40:

Both the DAX and the CAC-40 rallied from the late September 2011 low in five waves, which indicated that the late October 2011 high represented the end of just the first part of Minor wave 2 up. The rally was followed by a decline that unfolded through most of November 2011. In both the DAX and the CAC-40, the decline unfolded in three waves and ended above the late September 2011 low. The sharp rally that started on Monday is the start of the last part of Minor wave 2 up in France and Germany, namely Minute wave [c] of Minor wave 2 up.

Here are the updated charts of the FTSE-100 and the DJIA:

FTSE-100:

DJIA:

Both the DJIA and the FTSE-100 rallied from the early October 2011 low in three waves. Both the DJIA and the FTSE-100 are still in the second part of Minor wave 2 up, namely Minute wave [x] of Minor wave 2 up. The decline from the late October 2011 high unfolded in three waves through most of November 2011.

The preferred scenario is that Minute wave [x] of Minor wave 2 up is a double zigzag with the second zigzag taking the markets far enough down to fill the gap at 1151 - 1155 in the S&P 500. Within Minute wave [x], the first zigzag, Minuette wave (w) was completed last Friday. There was a strong expectation for Minuette wave (x) to unfold as a sharp rally. The expectations were dramatically fulfilled with the DJIA doing a 250 point gap up on Monday morning. Minuette wave (x) should be completed tomorrow (perhaps a 150 - 200 point gain in the DJIA for the day). The sharp rally will be followed by a second zigzag, Minuette wave (y), which is expected to unfold as a sharp decline, completing Minute wave [x] around December 6, 2011 with a downside target of 11050 in the DJIA and 1125 in the S&P 500.

The Santa-Claus rally is expected to start on December 6, 2011 on the DJIA and the FTSE-100, representing the last part of the three month long reprieve period. The rally is expected to unfold in three waves and take the DJIA just above 12000 in early January 2012.

A bullish intra-market divergence is forming, where the DJIA falls below the late November 2011 low in early December 2011, but the low isn't confirmed in the FTSE-100, the DAX, or the CAC-40. The end of Minor wave 2 up may be characterized by a bearish intra-market divergence in which the CAC-40 and the DAX rally above their late October 2011 highs, but the DJIA and the FTSE-100 fail to do so.

All the Same Market

For a number of years, the analysts at Elliott Wave International have been proposing that all the markets are moving together in a deflationary environment. The stock markets of the G-7 nations have been moving in lockstep with each other, with the exception of the Nikkei 225 index. It isn't just stock markets that are moving together, we are even seeing commodities (compare the DJIA to the CRB index) and gas prices at the pump move in the same direction as the stock markets of the G-7 nations. One of the latest articles on the subject is here.

Going with the idea that all the markets are moving together in a deflationary environment, there is a strong case to be made that we have completed just the first part of Minor wave 2 up.  This also strengthens the idea of the name "Crisis of the Western World" for the period associated with Grand Supercycle wave [IV], since the bearish social mood is affecting Western Europe, Canada, and the United States (commonly known as the western world) simultaneously.

Here are the charts of the DAX and the CAC-40.

Notice that both the DAX and the CAC-40 rallied in 5 waves from their lows. In both cases, Minor wave 1 down ended in late September 2011. The significance of the 5 wave rally is that a 5 wave structure is never the entire correction, just a portion of the correction. Therefore, the 5 wave rally from the low is the first part of Minor wave 2 up, which is unfolding as a zigzag.

Here are the charts for the FTSE and the DJIA.

Notice that the FTSE and the DJIA both rallied in 3 waves. In both of the cases here, Minor wave 1 down ended in October 4, 2011. Since the stock markets of the G-7 nations have moved together, the 3 wave rally from the low is the first part of Minor wave 2 up. A 3 wave beginning in a larger correction indicates a flat or a double zigzag for Minor wave 2 up. The Zweig Breadth Thrust signal that was triggered earlier this month in the DJIA has turned out to be a bull trap.

A 3-3-5 flat scenario for the DJIA calls for a sharp decline in November 2011 in which the markets fall as fast as it went up from the October 4, 2011 low, followed by a moderately sharp rally in December 2011. After the holidays are over, Minor wave 3 down is poised to start in early January 2012.

Minor Wave 2 Begins in France and Germany

The initial decline from the peak of the Primary degree bear market rally has ended in the CAC-40 and the DAX. Minor wave 1 down in both France and Germany were completed two days ago. A strong kickoff (up over 330 points in two sessions for the DAX and up over 100 points in two sessions for the CAC-40) from the low indicates a trend change -- Minor wave 2 up has begun in France and Germany.

Here is a chart of the CAC-40:

Here is a chart of the DAX:

As Minor wave 1 down neared completion, Moody's downgraded the credit rating of two major French banks. The downgrade generated fears in the mainstream media that the debt contagion was starting to spill over into the core of the European Union.

Minor wave 2 up will be a sharp 3 wave rally with a 4 month duration, to be completed in January 2012. This represents a short reprieve period for the core of the European Union. By the middle of December 2011, the mainstream media and the politicians will be convinced that the core of the European Union is protected from the debt contagion that is plaguing much of Europe. In January 2012, Minor wave 3 down will start, and all pretense of containing the debt contagion will be shattered.

On the longer term, social mood is deteriorating faster in Europe than it is in the United States and Canada. The DAX, the CAC-40, and the FTSE 100 should breach the March 2009 lows no later than May 2012. In contrast, the DJIA, the S&P 500, and the Wilshire 5000 won't breach the March 2009 low earlier than July 2012.