Those of you who know me well will know that I usually avoid a discussion of any sort of politics with friends or colleagues, primarily because in the US, friendships can be destroyed if people support opposite team members. I find that in the UK, people tend to be more tolerant of people's beliefs and religions in general, however, if you have read my posts from last year, then you have probably extrapolated that I support Hillary Clinton and PM David Cameron.
I typically dislike politics overall because U.S. politics often fall into predictable, dull rhetoric or melodrama with generalised sweeping statements focused on one-issue voters and reality TV discourse whereas in the UK, politicians tend to be much more clear and direct about their actions and plan of strategy. Thus far, PM David Cameron has stated at Davos last week that there will most likely not be a Brexit, although the UK will be firm about EU reform with immigration favouring highly skilled workers with university degrees and not towards Europeans who come to the UK simply to collect unemployment benefits.
However, to veer back on topic, I thought it would be interesting to compare movements in the stock market with U.S. Presidencies.
The stock market currently is nowhere near a stock market crash as in the previous 2001 and 2008 eras.
As you can see, typically, there is a reason why general investors and Wall St tend to be on edge every time there is a change in Presidency. 2001 was marked by the dotcom bubble and also 9/11, and 2008 marked the stock market crash. The U.S. is about to change Presidents again, and psychologically, this has made many VCs and investors nervous about the outcome, most likely because in their subconscious memories, this changing of the guard was always marked by a bear market.
However, if we examine the Stock Market Presidency Chart, the current Obama era is more similar to the previous Bill Clinton era in which there was strong economic growth. Both George Bush I and George Bush II had eras of extreme "military intervention" (aka attacking other nations) dominated by an overdependence on fossil fuels. The Iraq War caused a tenuous climb back to the 100% fibonacci retracement line marked by uncertainty, until the support gave away and we had endured several quarters in a row of a bear market.
The stock market currently is nowhere near a stock market crash as in the previous years of 2001 and 2008. In 2001, economic recovery after the dot com bubble had been further derailed by the events of 9/11, which catapulted the stock market into a bear market. If we compare the quarterly movements of Presidencies from George Bush I to the current POTUS, what we had experienced this past Dec is nowhere near the significant "violent" movements of previous eras and would be a great exaggeration to even call it a "stock market crash". The more accurate term for the Dec movement is a "correction." Certainly stock market sentiment is a little uncertain right now, as the waves have been rocky, but if we examine the current end of the week formation for SPY, a hammer with an extremely long tail formed that held the 187 horizontal support and 184 trend support in the weekly chart.
Hammer formation at the end of last week with a small head, strongly holding the 187 support line and potentially signaling the beginning of consolidation in the SPY weekly chart.
Although the opening and closing price of the movement was less than 1 dollar (ideally a 2-3 dollar difference is a stronger signal of a bull market) which created a tiny pinhead on top of the hammer formation, this could potentially signal the beginning of a consolidation period between 184-191 in the next several weeks. We initially had a shorter consolidation in November, but the consolidation period wasn't long enough to sustain an upward movement, and due to the fact that SPY tested the 161.8% fibonacci retracement line several times and was hovering in that area, it was due for a correction towards the trend support line.
In my extrapolation, the smaller the consolidation area, and the longer it is (6-8weeks) indicates a much better signal of a steady bull market. Currently the stock market is holding at the support, and has had a similar correction as the S&P downgrade in 2011.
The buy period will potentially begin in the 187-195 region as it nears the end of the consolidation period at the 184-191 area possibly 8 weeks from now in mid-March, and ideally this formation is what we should be looking for:
An 8-9 week consolidation pattern formed after the 2011 S&P downgrade that marked a steady bull market in the weekly chart for SPY.
Worst case scenario: If in March 2016, the US endures another 9/11 attack or a natural disaster that wipes out the entire west coast of California where Silicon Valley is located, then most likely we will have another stock market crash similar to 2001. In addition, in March 2016, if suddenly a significant portion of unicorn companies declare bankruptcy to become unicorpses, then we might have a 35-40% correction that might be indicative of a bear market into 2017-2018. If in March 2016, President Obama decides to declare war on Iran, then we might face another stock market crash as in 2008. (However, since the Iran Arms deal was approved last week, going to war would seem highly unlikely at this point.)
A scene from the Hollywood movie 2012, which shows geological disaster occurring on the west coast of California.
Most probable scenario: There will be some dips and waves, and in the next several weeks will be marked by choppy waters, but there will probably be no significant event that will occur in March that will send the stock market into a crash and most likely Iran will become a new market for the US and the UK to do business with in a steady continuation of the Hillary Clinton era bull market.
In addition, I recently saw a Bloomberg video in which the CEO of Morgan Stanley was interviewed at Davos, and I was a little surprised when he said that he didn't think oil would go below $50. I suppose he might've missed the memo from 2012 when the OPEC nations decided to phase out oil in favour of solar energy and when the Saudi Arabia PM made the announcement that Saudi Arabia will be the solar energy producer of the world. This dip in oil has been 4 years in the making. But then again, I'm fairly certain bankers don't have a tendency to rely on fundamentals nor macroanalysis and instead, have a preference to rely heavily on algos and stochastic charts and oscillators, which IMHO often do not have enough information to base a direction of the movement in the stock market.
So, in summary, we are nowhere near a stock market crash, oil is going to dip further as OPEC nations have already made a transition into solar energy, and called for the end of oil age; China's growth isn't slowing down as much as they are in a state of transition towards the 4th Industrial Revolution, and will potentially become the largest economy in the world and America will finally elect its first female President. It's about time.
By Sierra Choi
(Disclaimer: This post is intended for educational purposes only and not intended as stock market advice or a commentary about the nature of American politics)