Dan’s Blog

Stocks Pullback, Eye Election

Dan Calandro - Sunday, October 28, 2012

Stock market strength has pulled-back 10% from its high-water mark this year, the Dow Average is off 4%, and gold has trimmed 5% from its top. Even so, stock market returns remain very much inflated. In the most recent twelve months the Average is still up 18%, Strength has gained 47%, and gold has added a modest 4%. See below.

10-26-12a

The 15-51 Indicator provides the most revealing view of current stock market dynamics – inflation is prevalent and correction is underway.   

Despite solid gains so far this year, stock market strength is clearly weakening. Its recent drop, no doubt, is a preamble to broader market declines in the near future. How can I be so confident?  

Show me the good news – the vibrant economic data or strong corporate performances.  Real economic growth continued to languish around 1% for the most recent quarter and even Apple’s earnings disappointed the Street this time around. Certainly not the recipe for strong double-digit stock market returns as shown above.

While significant stock market retrenchment is still warranted, "the market" appears to be waiting for the electoral outcome before making its definitive move. Of course, the Bush tax cuts are also set to expire next month. I fully expect that to happen, by the way, regardless of who wins the election. In any event, both the election and expiring Bush tax cuts will inflict downward pressure on stocks and increase volatility. Be ready for it.

Elections matter, no doubt, and take on even more importance when the Market is in dire need of dramatic changes in fiscal and monetary policies. To that end, the Average looks hopeful for such change; Strength seems to know better, and gold still looks lost. Here’s the year-to-date picture.

10-26-12b

Stay tuned...


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