What Should We Expect From the Post-Super Committee Stock Market?

I didn't think there was a chance that the Super Committee would end dead-locked, but the gridlock in Washington seems impossible to fix without an election.  So, we'll have to see.  However, the stock market itself is tons smarter than me, so let's see if there is an answer that the stock market is telling us.

To begin with, our Asset Allocation Model is our MESSAGE.  We don't start out with our interpretations and work toward developing our model; instead, we start out with those conditions that have had the best record of historically predicting the stock market, and then we try to find an outcome that will match the predicted path of stocks.  And today, this model remains in a very bullish position, with each of our composites (Psychology, Monetary and Valuation) in the green zone.

As I look for the good news to fit the good condition of our barometers, I'm once again pulled back to that "rhyme" from last year's correction.  This year's market has shown a little stronger trend AFTER the "head" of last year's chart pattern.  We've discussed this many times, but many corrections or bottoms of bear markets take on the pattern of an upside down (reverse) head-and-shoulders pattern.  Last year's correction did.  That means you have an upside-down left shoulder, a head and then a right shoulder during the final part of the correction.  Just take a look at the comparison below once again as we show you the possible outcome that we could be approaching.

Click on the image above to view larger charts.

As you can see, the very close similarity of these two periods deviated some on the recent rally as we saw a higher high this year - unlike the level rally to its neckline that occurred in August of last year.  That is a positive action and could be explained by the good Q3 earnings this year, along with some of the recent economic news.  It could also be explained by the expectations that the Super (??) Committee would come up with a compromise agreement.  That now seems very unlikely.  However, if our rhyme has any wisdom in it, it seems to indicate that we might have 2 more weeks of unsettled and weak markets, but we should not see a lower low.

Despite this stock market indigestion, we wish everyone a Happy Thanksgiving this week.

Don Hays

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