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Friday, March 7, 2014

/ES And SPY Premium Article: "Don't Fight The Fed - An Update" An EchoVector Analysis Outlook For The S&P 500 Composite Index And The Dow 30 Industrials Composite Index

A Stock Market Melt-Up And The US Political Economic Cycle

 

Summary
  • Federal Reserve supports stock market to stabilize last presidential midterm election year.
  • Stock market melts up after midterm election year in last three US Administrations.
  • The stock market momentum that follows the post presidential midterm election year and runs through all three administrations is on course and offers a strong indicator to this year's forecast.

BACKGROUND

In August of 2012 I wrote an article examining the Federal Reserve Bank's interest in avoiding excessive market volatility in the a presidential midterm election year of 2012, and instead the Bank wanting to be a significant and effective force and national institution promoting economic stability and economic encouragement to the American electorate during that important political economic and financially sensitive time. In that article, titled Don't Fight The Fed, I explained how the US Federal Reserve Bank lead a global central bank coordinated and orchestrated effort to support stock prices and the wealth effect with a Federal Reserve Bank generated composite stock market price support level bridge during one of the most vulnerable periods in the political economic cycle. Supporting composite stock market price levels and preventing potentially ensuing cyclical price level erosion, and positively trajecting prices further upward instead, was the purpose of this coordinated global central bank intervention.

This article is a follow-up of my previous article. In it I would like to focus on, and to review, how large cap composite equity prices have in fact responded to the presidential mid-term election cycle central bank intervention which occurred in the summer of 2012 within the US political economic cycle, and to take a closer look at the current market price level trajectory induced by the central bank when viewed within the context and the time span of stock market price levels over the last three 8-year American presidential regimes: the Clinton regime, the Bush regime, and now the Obama regime.

A LOOK AT THE LAST THREE US PRESIDENTIAL ADMINISTRATIONS' POST MIDTERM ELECTION MELT-UPS IN STOCKS

Let's begin by looking at the following 20-year price track of the S&P 500 Composite Stock Index as reflected a proxy chart of the popular /ES E-mini Futures on that index.

S&P 500 Stock Composite Index /ES E-mini Futures 20-Year Monthly OHLC Perspective

(click to enlarge)

In the chart above note the key white 16-year market financial cycle echovector running from The April 1, 1997, the echobackdate and year following the Clinton Administration mid-term election year, to the April 1 2005 echobackdate and year following the Bush Administration mid-term election year, to the April 1 2013 echovector start date, and year following the Obama Administration mid-term election year.

Notice also the general horizontal price resistance level highlighted in white running from the Clinton Regime's price level toppiness in year 2000 to the Bush Regime price level toppiness in year 2007 to the late spring and summer time sell in May and go away period of the Obama Regime in 2013.

In May of 2013 prices had faltered at this critical time and price level and fell nearly 10% into June. Rallying off the June lows prices began to fall back again in August, potentially setting up a toppy formation much like that in 2007.

It was in the Federal Reserve Bank's genuine interest, and in The Federal Reserve Bank Chairman's focus, his specialty, and his legacy interest, to prevent another market collapse reminiscent of 2008 or 2001-2002, and this seasonal price pressure weakness from accelerating into a more precarious market price phenomena and political economic market cycle echo. And the central bank's ensuing coordinated efforts to place a bridge under stock market prices that summer could not have been more effective nor better timed for this purpose.

The bridge in place, and holding well into November, and that month's returning annual and congressional cycle lows kicking in, with them occurring at these upper and bridged supported price levels, set the stage for significantly better price level momentum trajectory than otherwise, and eventual price level resistance breakthrough and price melt-up, in lei of price level collapse. Whereas these last three regime mid-term election years appear characterized by little price progress going into July after their first quarter highs, the year that follows, being year 5 in the existing administration's regime change cycle, holds onto momentum price gains on both a year-over-year basis and on a 2-year congressional cycle basis. The latter being even stronger, accelerating prices even further and propelling them into melt-up. This effect was anticipated in my article of August 2012, and has been central to my positive market forecast since.

OUTLOOK

Some analyst have been calling for a pullback from high's this quarter into lower lows this fall, with a bounce back to higher highs going into next year. The above analysis would tend to support such an outlook.
However, currently vigilance and caution at the high price level present may be the better part of wisdom. We have gained over 44% on the S&P since August 2012, and have completed what might be viewed, at best, as the first half of a melt-up that occurs before a potential second wave of melt-up cyclically begins in the second half of this year. Be mindful that sometimes the market, anticipating far enough into the future cyclically, seems to rush to get there early, accomplishing momentum over-extension. This might have also, in part, contributed to the drama of 2008 with regard to downside extension.

At this time within this regime change cycle within the political economic cycle, and at current price levels, my suggestion is to remain nimble, and to let the best price extension scenario evolve, but to also remain ready to lock in gains through hedging utilities in the event of scope relative counter-cyclical occurrences, and to do so possibly right up into the second quarter of next year.
One way to accomplish being nimble would be to set up an active and adjustable OTAPS position polarity switch and straddle to manage your general stock market exposure to any potential changes in the general price level momentum and your forward outlook. Setting straddles at momentum echovector switch level prices is an effective and opportune measure and advanced trade and position management strategy.

One way to employ such a straddle would be to utilize the SPY ETF and/or the DIA ETF. By setting up an advanced trade technology (see "On-Off-Through Vector Target Price Switch") at, for example, $190 on the SPY or at $166 on the DIA, with appropriate dynamic triggers and stops included, such a straddle can be employed.
To perform the short side of the straddle, set a short trigger below either of these mentioned target price switch levels (e.g., $190 on the SPY and/or $166 on the DIA) pre-programmed as a "repeating short trigger switch" at the trigger level on reverse down-tick action through the trigger price, with stops set to activate on reverse uptick up-through action.

To perform the long side of the straddle, set a long trigger above either of these the target price switch levels ($190 on the SPY and/or $166 on the DIA) pre-programmed as a "repeating long trigger switch" at the trigger level on reverse uptick action through the trigger, with stops set to activate on reverse down-tick down-through action.
Now may be a very good time to employ this general market straddle and this more advanced trade technology switch and active position management methodology, especially when reviewing the proxy chart of the S&P 500 over the past 20 years within the current presidential regime change cycle.

Thanks for reading. And Godspeed in your investing.

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