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French Election: Socialism, Bull Markets, Bear Markets -- and Social Mood

New interview with European Markets Analyst Brian Whitmer

by Alexandra Lienhard
Updated: May 05, 2017

Brian Whitmer, the editor of our European Financial Forecast and contributor to Global Market Perspective, discusses sentiment and social mood across Europe as French voters head to the polls on Sunday to elect France's new president.


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[Editor's note: The text version of the video is below.]

Alexandra Lienhard: French voters head to the polls on Sunday for the final round of voting to elect France's new president. Joining me today to offer some perspective is European markets analyst Brian Whitmer, who edits Elliott Wave International's European Financial Forecast and contributes to the monthly Global Market Perspective. Hi Brian, nice to see you.

Brian Whitmer: Hey, Alex. Good to be here.

AL: So let's start today by talking about something that you published in the May issue of the European Financial Forecast. You had wrote that "Socialists aren't the first political party to complete a round trip on the social mood merry-go-round. They also won't be the last." Can you explain what you mean by that?

BW: Yeah, well, what I'm referring to is this really fascinating election in France. And with everyone watching the race between Le Pen and Macron, the far right versus the centrist newcomer, I think what's more interesting is really the full-scale implosion of the Socialist Party. Right, this is the party that has dominated French politics for 40 years. And the Socialist candidate not only lost, he lost in the first round with less than 6% of the vote. That's an astounding result. And I have a chart just to put that into perspective. This is the SBF 250 going back to the bull market back here in the 1950s, which ends here in the early 1960s. And this is when the Socialists really began to dominate French politics. You've got this two-decade bear market that begins in 1969. The Socialists really begin to win power. This is when Francois Mitterrand began to rebrand, reboot the party. And in 1981, Mitterrand goes on to win the presidency. He holds office for 14 years. And the Socialist Party really dominates French politics ever since. Since 1969, it's either been the ruling party or the largest opposition party. And all of that, of course, ended last month. We've got another two-decade bear market, at least a sideways trend here. Stocks have gone-- really made no progress in 17 years. And the Socialists lose power. So that's what I mean by this sort of merry-go-round in social mood. You've got a bull market-- or you've got to have a bear market that brings a new party into power. Then you've got a bull market that keeps him in power and another bear market that takes that power away. And we'll see on Sunday who that power goes to.

AL: Now let's move onto another major financial center, London. Last month the UK called for a snap election. And you argue that that did not make a difference to the FTSE. Why is that? And what are you looking for overall?

BW: Right, well, the FTSE did happen to fall on the day that Theresa May called for that snap election. But I think the reversal was inevitable. If we look at the wave pattern, we've seen this fairly textbook five-wave rally since the February 2016 low. That's down here. We've got wave one here. We've got an ABC for wave two. Wave three ended. Here's wave four. And we've been pushing higher in this extended fifth wave. Back in April, I called attention to this ending diagonal. That's a terminal wave pattern that signals a reversal. And we've seen that reversal. I think the other interesting confirming evidence is the DSI, the Daily Sentiment Index. That's a survey of futures traders. If we look here, it followed a fairly typical profile. We see extreme pessimism at the lows in February. These are DSI readings in the single digits. Wave one pushed those readings up to about 50%. That's balance of bulls and bears. Wave three pushed it up to 80%. That's not extreme, but it is elevated. And then wave five, that final leg of the rally, pushed those DSI bulls up to 96%. So that's a good indication that we should see a reversal, which is what we've seen.

AL: Now, whether it be the German election coming up this year, or the importance of Germany to both European markets and global markets in general, I thought it'd be good to talk about Germany a little bit today. Now, you recently made the observations about the sentiment in the DAX. What are you looking for?

BW: Yeah, Germany is always a critical market to watch, just because of its impact on global markets. We've been tracking, again, a five-wave rise since the March 2009 low. And if we take a look at that chart, here is the March '09 low. And we've got another fairly textbook five-wave rise. Wave one, here's wave two, wave three ended here, wave four. And this rally now is the fifth and final wave that has pushed the market to new highs. Again, what I think is more interesting is how sentiment has behaved. If we look at these lower two graphs here, these are investor expectations from Centex Behavioral indexes. We've got individual investors on the top and we've got institutional investors on the bottom. By the way, if you want to look at what sentiment looks like at a major low in the market, take a look at March '09. This is when these indexes fell negative. This really shows the pessimistic sentiment that occurs at a major low in the market. They pushed higher almost immediately. We add in 2010, 2011 highs in this index, and they treaded water for the past four or five years, until this year. In 2017, these indexes started creeping higher again. And right now, we're at near-record extremes in investor expectations, both from individual investors and from institutional investors. So again, I think this is confirming evidence. Nothing says that a top is imminent. But I think these indexes definitely say that we're in the latter stages of this rally.

AL: Well, Brian, always great to talk with you. Thanks for joining me today.

BW: Hey, thanks, Alex.

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