Four More Years of Obama

With all three of the presidential debates completed, the election is looking to be a close contest. The closest parallel to the 2012 presidential election is the 2004 presidential election, in which the incumbent of that time, Bush 43, won a second term by a narrow margin.

From the perspective of social mood, bear markets normally result in incumbents getting thrown out of office by a landslide, as was the case with Herbert Hoover in the 1932 presidential election at the low of Supercycle wave (IV) down and Martin Van Buren in 1840 during Supercycle wave (II) down (1835 - 1859).

The 2012 presidential election, however, is taking place in a mixed mood environment, resulting from a very large bear market rally off the March 2009 low. It was the same way in the 2004 presidential election as well, with a 5 year bear market rally, Primary wave [B] up (2002 - 2007) of Cycle wave w down (2000 - 2009) with a mixed mood environment in play.

In a mixed mood environment, the candidate with the best ground game and the highest level of organizational strength will be the one that wins. George W. Bush (Bush 43) won a second term by a narrow margin in 2004. Bush 43 had a stronger ground game than John Kerry did due in part to the Koch-ALEC cabal and the organization of the religious right. In the current presidential election, President Obama is on course to win a second term by a narrow margin. Unlike the 2008 election in which Obama rode a massive wave of voter anger (from the "Panic of 2008") all the way to the White House, the 2012 election will prove to be much harder and will take a great amount of effort to win. President Obama's superior organizational strength is what will allow him to win a second term in the midst of a mixed mood environment.

The bear market rally off the March 2009 low appears to be incomplete and needs one more five wave rally to complete the structure. The rally should unfold through election day and peak about a third of the way into November 2012, as the chart below illustrates:

The chart above shows Minor wave 5 of the 2 year bearish rising wedge, Intermediate wave (C), that started in June 2010. Minor wave 5 is unfolding as a triple zigzag with the last part of the third zigzag still to come. The upside target is 1484 for the S&P 500 and 13750 for the DJIA.

In the midst of the mixed mood environment are undercurrents of bearish social mood, which is most clearly seen in the DJIA / gold ratio. As the chart below shows, the DJIA in terms of real money is in a very clear down-trend with a series of lower lows and lower highs throughout the Obama Administration Period so far:

The decline in the DJIA / gold ratio also explains why Obama's approval rating displayed a long term down-trend. In addition, the most recent polls are painting a mixed picture, with some polls putting Obama ahead and some putting Romney ahead.

Intrade is currently projecting a 62% chance that Obama will win a second term, although some such as Nate Silver is currently projecting a 73% chance that Obama will win. It will be a close election, with Mitt Romney reaching 250+ electoral votes (it could possibly go as high as 260), but California, Oregon, and Washington will put Obama over the 270 electoral votes needed to win once voting is completed in those three states.

The last two cases of a president winning a second term during a bear market rally was Bush 43 in the 2004 election and Richard Nixon winning a second term in 1972 with the mixed mood environment in play as a result of Primary wave [D] up of a Cycle degree triangle, Cycle wave IV (1966 - 1974). Obama is on course to win a second term on November 6, 2012.

It is perhaps instructive to look back and realize that both Bush 43 and Nixon declined in popularity during their second term. Bush 43 saw his approval rating plunge to 25% in the wake of the "Panic of 2008" and Richard Nixon was pressured out of office less than 2 years later due to scandal. If the forecast for a Primary degree decline from 2012 to 2016 is correct, than Obama will face the same fate as Bush 43 with social mood becoming increasingly bearish, culminating in a wave of voter anger that makes conditions ripe for someone like Michele Bachmann or Paul Ryan to rise to power as the next president of the United States in the 2016 election.

President Obama's approval rating will likely plunge soon after the elections taking place. In the midst of all the talk about a "fiscal cliff" in economic policy that has been dubbed "Taxmageddon" and is set to be reached in January 2013, there is another cliff that we are approaching, and that is the end of a 2 year rising bearish wedge in the DJIA, S&P 500, and the Wilshire 5000. The resolution of the wedge pattern is expected to be relatively swift with the full retracement of the wedge expected to be completed in June 2013.

Here is a chart of the wedge and the drop-off that follows:

Labelled on the chart is President Obama's approval rating at important junctures. At the May 2011 high, when the DJIA reached 12876, President Obama's approval rating briefly reached 61% in the aftermath of the assassination of Osama bin Laden. Just 5 months later, at the low of Minor wave 2 down within the larger wedge, the United States was downgraded by Standard and Poors from AAA to AA+, and Obama's approval rating reached a low of 38%. As the peak of the bear market rally approaches, Obama's approval rating has only partially rebounded from the October 2011 low and is currently at 48%.

The expectation is for Obama's approval rating to take a massive plunge downward as the retracement of the rising bearish wedge unfolds. The forecast is for Obama's approval rating to fall to a low of 28% to 32% by June 2013. The sudden decline in social mood starting in mid November 2012 points to a scenario where there is no resolution on the "fiscal cliff" at all due to strife and discord between Obama, John Boehner, Harry Reid, and Mitch McConnell, which could result in another downgrade on the credit rating of the United States.

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".

Roadmap for 2012 and 2013

Markets are on the verge of a waterfall decline larger than the one that unfolded in August 2011 as Minor wave C down (May 2012 - June 2013) of Intermediate wave (W) down (Feb 2011 - June 2013) continues to unfold, completing an intermediate degree expanded flat.

All of the major indexes are clearly in the midst of a counter-trend bounce as evidenced by the choppy overlapping waves off the June 4, 2012 low. Here is a chart of the DJIA showing the advance from the June 4, 2012 low:

The rally off the June 4, 2012 low, identified as Minute wave [ii] of Minor wave C down, is nearing completion. The rally appears to be unfolding as a double zigzag with minuette degree sub-waves (w) and (x) complete and the second zigzag in the process of unfolding. With Minuette wave (y) = 0.618 times the length of Minuette wave (w) in the DJIA, an upside target of 13085 is projected based on the fibonacci relationship between the first and second zigzags within Minute wave [ii]. The rally is also losing momentum as the RSI and MACD are no longer confirming the move higher.

Minute wave [ii] of Minor wave C down is projected to reach completion in early August 2012. A massive waterfall decline, Minute wave [iii] down, will follow and last roughly 3 months. Here is a longer term chart of the DJIA, showing an updated road map for Intermediate wave (W) down (Feb 2011 - June 2013) of Primary wave [X] down (Feb 2011 - June 2016) within Cycle wave x up (2009 - 2021):

First the longer term perspective. Since Minor wave B up (Oct 2011 - May 2012) is almost 1.618 times the length of Minor wave A down (Feb 2011 - Oct 2011), then it is very likely that Minor wave C down (May 2012 - June 2013) will have 2.618 times the length of Minor wave A. This projects a downside target near 8500 for the end of Intermediate wave (W) down in the DJIA. Now we consider Minor wave C down in terms of its smaller sub-waves. Minute wave [i] down has 27% of the projected length of Minor wave C down with most of it retraced by Minute wave [ii] up. With 93% of the distance to the projected downside target of Minor wave C at the end of the second wave yet to be traversed, there is a strong case for Minute wave [iii] down to have 2.618 times the length of Minute wave [i] down, which projects a downside target of 9750 by October 2012.

Minute wave [iii] down should unfold during August, September, and October with the center of the downward impulse occurring around September 19, 2012. The "point of recognition" is important as evidence of the declining part of the business cycle should be abundantly clear by then, resulting in the Federal Reserve making a move to launch QE3 in an effort to prop up the economy and the stock market. After a multi-month sideways period, Minute wave [v] down should last 3 months with the center of the downward impulse occurring around May 20, 2013. The center of Minute wave [v] should be significant as well. Recall that Occupy Wall Street appeared in September 2011 as the fifth wave of the expanded flat (Minor wave A down)) unfolded. The center of Minute wave [v] down is expected to be associated with the advent of "Occupy Wall Street Phase 2" in which a much larger number of people take to the streets than before.

The same type of scenario also applies to broader markets as well, as the chart of the S&P 500 shows with the Intermediate degree expanded flat unfolding in the index:

The target for Minute wave [ii] of Minor wave C down in the S&P 500 is 1405. Minute wave [iii] down is expected to take the S&P 500 down to 1000 with the relationship Minute wave [iii] = 2.618 * Minute wave [i] expected to unfold. The downside target for Intermediate wave (W) down in the S&P 500 is 814, to be reached in June 2013.

The second half of 2012 and the first half of 2013 will go to the bears as the rest of Intermediate wave (W) down unfolds, after which the markets are projected to rally from June 2013 to June 2014. By the end of Intermediate wave (X) up, there should be a consensus that QE3 was successful in propping up the stock market. The upside targets for the end of Intermediate wave (X) is 1100 in the S&P 500 and 11700 in the DJIA. Intermediate wave (Y) will then follow, unfolding as a zigzag, completing Primary wave [X] down in June 2016 with a downside target of 5500 in the DJIA and around 550 in the S&P 500.

A Time of Consolidation

The stock market has been in a three month consolidation period that is nearing completion. After the consolidation period is complete, a final push to new bear market rally highs is expected before peaking for the year on June 24, 2012 as the business cycle high point is reached.

Here is a chart of the DJIA:

The DJIA has been tracing out a 3 month expanding triangle, which is identified here as the second x wave of a larger triple zigzag, Minor wave B. Wave B is the complex leg, unfolding as a triple zigzag. Waves A, B, C, and D are complete with wave E of the triangle close to completion. The triangle should be completed on May 15, 2012 with a downside target of 12680. The triangle will be followed by a powerful thrust upwards in three waves that will take the DJIA to the upside target of 13625 by June 24, 2012.

Wave E of the triangle is unfolding as a simple zigzag. The E leg of the triangle contains a smaller triangle as can be seen on a close-up view of the DJIA:

The triangle, Subminuette wave b of Minuette wave (e), has a duration of around 3 days and should be completed late tomorrow (May 10, 2012, around 2 PM New York time). The smaller triangle is also unfolding in the S&P 500 and the Wilshire 5000. The D leg is likely the complex leg (double zigzag) of the smaller triangle.

The triangle count for Minute wave [x] (the second x wave in a triple zigzag) only applies for the DJIA. In the S&P 500 and the Wilshire 5000, Minute wave [x] is unfolding as a double three (expanded flat - triple zigzag -- flat) pattern that will also end in May 15, 2012.

The chart for the S&P 500 illustrates the double three count:

The downside target for the S&P 500 is 1336, reflecting the relationship Subminuette wave c = 1.382 * Subminuette wave a within Minuette wave (y). After the downside target is reached, a powerful thrust to 1452 is expected to follow with the upside target reached on June 24, 2012.

A time of consolidation is in progress with one final push to new bear market rally highs to start on May 15, 2012. Exuberant optimism should go into the stratosphere during the final thrust with the possibility of record bullishness in the picture. The record bullishness could easily take the form of people making very large extrapolation leaps, such as calls for Dow 30,000+ and a lot of talk about the "American Miracle" in the economy from economists and people in the mainstream media.