Friday, May 1, 2015

Treatise on the Bear Market Rally and Elliott Wave Count Update

It is no secret that counting waves has been difficult ever since the rally out of the March 2009 low began. At first, it appeared to be unmistakably corrective in nature, but starting in 2010, some have switched to an impulsive count. But, I maintain, as I have ever since the inception of this blog, that the rally out of the 2009 low is a corrective, bear market rally, which, when complete, will be fully retraced. The reason I have and continue to remain so firm on this belief is because of the absolutely horrid technicals upon which this rally has occurred, not the least of which is both the lack of and declining volume encompassing the entire rally, which I have illustrated before on this blog. Additionally, a lack of secular bear market bottom valuations at the March 2009 low also argues against a new secular bull market currently being in place. Some argue that the 2009 bottom is equivalent to the Supercycle low in 1932. This assertion can be proven incorrect on many accounts, mostly the failure of measures of valuation to reach historical levels associated with bear market lows, but not the least of which is the position of the commodity cycle. Back in 1932, the deflationary low in the stock market coincided with a low in a commodity bear market cycle. This time, the 2009 low occurred just before a high in a commodity bull market cycle (2011), and even at a lower high in some commodities that topped coincident in the end of the credit expansion in 2008. This dichotomy between 1932 and 2009 is more than notable, and indicative of coming deflation and depression, as opposed to reflation and economic expansion as was the case in 1932. In 1929, commodities made a lower high coincident with the high in stocks, If anything, this current divergence between commodities and stocks is an indication of the end of a stock bull market, not the beginning of one. That generational low, that was seen in association with the 1932 bottom in stock prices, as well as the 1974 secular bear market bottom, did not occur in 2009, and is coming up. Whether this is the end of the old bull market or, more likely, a rally in a secular bear market, either way the rally is terminal, which, when complete,  as hard at it is to believe, will result in a breach of the March 2009 lows.

Lance Roberts, of STA Wealth Management, and host of StreetTalk Live, wrote an article opining on the secular bull/bear market debate. While many are claiming that we are in the midst of a secular bull market because prices have registered new all-time highs, the truth is more than meets the eye. Roberts highlights what true secular bull markets are made of, including improving fundamentals and low valuations. Neither of which we saw in 2009 or today. Instead, this has been a liquidity fueled rally in a secular bear market, which has only ensured a worse ultimate outcome due to the attempt by authoritarians at staving off a depression. Ironically, the attempt by governments and central banks, worldwide, at preventing a depression has only ensured a deeper depression, and more ultimate damage, down the road. All systems in nature require setbacks and periods of rest to thrive in the long-run, and the ebb and flow of human social progress, reflected in economic growth and well-being of societies, is no exception to that rule. There are no shortcuts, and  in the end mother nature cannot be cheated.

The piece, posted by Zero Hedge, can be found by CLICKING HERE.

Additional evidence refuting a new secular bull market beginning in 2009 is the fact that every secular bull market in history has seen a cyclical bear market prior to taking out the all time highs. Case in point, the market during the 1932-1937 rally did not surpass the 1929 high before enduring a 50% decline and cyclical bear market for Cycle Wave II. The secular bull market that began in 1974 did not make new all time highs until after another cyclical low in 1982. That is not what has occurred this time, but instead a parabolic rally off the lows due to central bank inflation, and economic distortions created by government and those in power. These distortions have enabled leveraged speculation in asset markets and corporate buybacks, propping up stock prices as a result. But soon corporate buying, will turn into corporate selling, as companies are forced to liquidate their assets as the margin calls come rolling in. The market has been in a massive topping process since the first quarter of 2000,and despite media and higher education propoganda, this has not  been an economic recovery, and nor was the period between 2002-2007. Instead, we have been in a developing depression since 2000, that trend is about to accelerate to the downside. We are facing the biggest margin call in history, and it is going to lead to widespread defaults, bankruptcies, and outright deflation.


But this is not just about the stock market. We had a historic build-up in the value of money + credit from the early 1980's until 2008, and arguably still ongoing. The magnitude of the credit expansion, as well as the corresponding bull market in equity valuations, is unprecedented in history. Both the societal-wide credit expansion, as well as the bull market in valuations which ended in 2000, FAR exceeded that which was seen leading into the 1929 Supercycle top. This suggests a higher degree top, of Grand Supercycle degree, and resulting credit collapse that is more severe than the great depression. This is the natural ebb and flow of nature, and it should not be tampered with by authorities, as both expansion and contraction are a natural part of any growth system in nature. Unfortunately, ever since 2000, the authorities, especially the private global central banking cartels worldwide, have been trying to prevent the natural corrective process that naturally occurs after an overvaluation. As a result of the most extensive liquidity reflation efforts in monetary history, asset prices have been propped up as a result of central bank inflation and corresponding leveraging up of bank reserves by commercial banks to speculate in asset markets. Please CLICK HERE to read a piece by Doug Short on margin debt with charts. Despite rhetoric and propaganda espoused by the financial media, and manipulations and distortions by government of economic data such as unemployment and inflation, this rally is NOT based on solid improving fundamentals, but rather increasing debt and liquidity, the same combination which resulted in the financial crisis in the first place. How is the answer to a debt problem, more debt? It isn't. What it is, is a combination that will be ultimately lethal to the global financial system. But this is what the authorities have been embracing, all to get re-elected and to make themselves look good until they are out of office, at the expense of the citizens.

Now to the Elliott Wave Count. I simply cannot justify labeling the rally from the March 2009 low as an impulse, for reasons given above, as well as simply the last of clear impulsive behavior from a pure Elliott Wave standpoint. Please see My Prior Blog Post explaining and illustrating this in detail. This being said, we do have a potential triple zig-zag in place from the March 2009 lows.



This count would imply the rally is complete or nearly so. We also have a divergence between the DOW and S&P 500, where the S&P has moved above the February/March high, but the DOW has not. This is a striking divergence and either the DOW has to erase this non-confirmation by making new highs, or, if this divergence cannot be mended, this fractured market is warning of a major market top.

Another non-confirmation that takes on equal weight, if not more, than the DOW/S&P divergence, is the failure of the Dow Jones Transportation Average to confirm the Dow Jones Industrial Average in taking out the highs of 2014. The Transports topped in November 2014 and there has been an ongoing non-confirmation between these two indexes ever since. This is a Dow Theory non-confirmation and is warning of a potential market top and resulting Dow Theory Bearish Primary Trend Change.



While the preponderance of the evidence suggests a market top is near. This rally is in month 73, and, depending on how one looks at it, in terms of time is among one of the most or THE most stretched rallies in history. The highly stretched nature of the rally makes for an extremely dangerous market environment, and the risk is absolutely enormous for an outright market crash. This is NO time to be complacent, but rather to be aware of the facts of the market environment in which we are operating: a completing 15 year topping process and a bear market rally which,when complete, will lead to a collapse in asset prices across the board and resulting economic depression.



However, to remain objective, while not favored, there is another possibility with the Elliott Wave position of the market, and that is that the bull market from 1974 never ended, and is still ongoing. While there are many problems with this count, as I have alluded to on prior posts, we must nonetheless remain objective and present it as a possibility. A joint move to new highs by both averages that serves to mend the non-confirmation currently in place would certainly lend credence to this count, and imply a top in 2017, a Fibonacci 8 years from 2009. While this might sound compelling from the standpoint of the elapsed time of bull markets being a Fibonacci number of years, which is supported by history (1932-1937 rally was a Fibonacci 5 years, the 1982-1987 rally being 5 years, the 1987-2000 rally being 13 years, the 2002-2007 rally being 5 years), we are living in truly unprecedented times, and due to the degree of a top we are facing, prior rally duration may not apply. However, in order to remain objective it must nonetheless be considered as a possibility. The Dow Theory will likely be an important indicator of the market's direction between now and 2017.



Observation: I have been thinking about the possible reasons this rally has been going on so long and gone so far, and I considered the fact that the market rallied for 60 months between 2002-2007 and, using intraday extremes, advanced a total of 7000.61 points on the DOW, or 97.26%, and the decline that preceded that rally occurred from 2000-2002, and declined 4,552.79 points, or -38.75%. From 2007-2009, the market declined 7728.15 points from high to low, or -54.43%. Then it occurred to me that since the market was able to stage a 60 month, 7,000 point rally on the DOW from 2002-2007, following only a 4,552 point decline, the fact that the decline from 2007-2009 was more severe than 2000-2002, might be the impetus for the market to rally further this time as well, to be proportional. So, I conducted a few calculations and came up with the following: Using arithmetic scale, the ratio of the 2007-2009 decline to the 2000-2002 decline, is approximately 169.7%. Applying this ratio to the advance from 2002-2007 (7000.61 points) yields 11,883.21 points. From the 2009 low, should this ratio analysis be correct, the market would top at 18,353.16. Given that the high so far is 18,288.63, and this target is 64.53 points, or 0.35% above the current all-time high, the market is in a position to validate this analysis. Time will soon tell.



Friday, January 30, 2015

Deflationary Pressures Mounting

The books are being closed and the numbers are in on the first month of January, and it was not a good month for markets. Historically, a down January has not boded well for the rest of the year, and 2015 looks to be setting up to be a MAJOR down year across the board. I have always maintained, ever since the inception of this blog, that the rally out of the 2009 low is a bear market rally, or a rally within the context of a secular bear market. While this may seem implausible or downright crazy, remember what the people who were, throughout the 2000's, calling for a historic deflationary collapse sounded like to the mainstream media and general public; they needed admittance to a mental ward then, too. But, despite the vast majority of pundits, economists and anlaysts dismissng and ignoring the warnings of a financial collapse, the most severe bear market and recession since the great depression occured, and the secular bear market reasserted itself. Once again, with a reflationary rally in equities carrying to a new all-time high, economists and pundits are once again dismissing warnings of a deflationary collapse, instead focusing on the "recovery". This is not a recovery, but rather early in an ongoing depression. The secular bear market is still in force, and will once again reassert itself, and once again will blindside the majority of so-called analysts and economists. The data still points to this entire move occurring within the context of a secular bear market, and with a reflationary bear market rally that has been stretched in time and price in the case of equities, along with crude oil and commodities resuming their larger bear markets, along with relative weakness in foreign markets, the stage is being set for the biggest financial collapse and resulting economic depression in U.S. history. To review:

Crude Oil

Topped at $147 in July 2008, and has been in a bear market ever since, despite the most aggressive inflationary monetary policy by world central banks on record. The first leg down completed in late early 2009, and then staged a counter-trend rally up into the May 2011 top. Despite calls for $200 oil, true to Elliott Wave form, oil prices will break the 2009 lows as deflationary pressures intensify in the next leg of the bear market.  



Commodities

Topped in July 2008, staged the first leg of the bear market into late 2008, had a counter-trend rally into May 2011, and topped out at a perfect Fibonacci 61.8% retracement of the initial decline in May 2011, and is now resuming its larger bear market. Here too, prices will ultimately break the late 2008 lows as global deflationary pressures intensify. 





There is a lot of talk on the mainstream media about falling oil prices being "good for the economy" and hence positive for economic growth by supposedly putting more money in the hands of consumers. This is not the case, despite the propaganda and false information. Rather, the dynamic that is taking place is that the global economy is heading into depression, and demand cannot keep pace with supply. Falling commodity prices, rather than being "good" for the economy, are simply indicative of the liquidity strains that are appearing in the system, and the global economy heading into depression. Ironically, this is in part due to all the central bank intervention and manipulation, proposing more leverage, debt and liquidity to fix a solvency problem. Further, oil producers are strapped for cash and need as much of it as they can get, and hence are refusing to cut production even at these low price levels. This simply exemplifies the shortage of money in the world, which leads to the next chart, the U.S. Dollar. 


U.S. Dollar

This is the one market that has been hated all along this decade-plus long topping process in risk assets. After a Supercycle bull market in equities, along with a greater than 96% devaluation of the U.S. Dollar through the issuance of massive quantities of dollar-denominated credit over the past century, this whole credit inflation scheme is set to reverse in a big way, with, ironically, fiat currencies as the beneficiary. The U.S. Dollar should out perform relative to the other world currencies for quite some time as the deflationary collapse ensues.




Crude Oil and Commodities have come a long way down since the Summer of 2014, and are due for a relief rally. However, this rally will only be counter-trend, and after its completion, both will continue their larger bear markets.

Shipping

The Baltic Dry Index Measures shipping costs for dry bulk commodities. It is a good measure of global economic activity, and as is clearly evident, all is not well on the global economic activity front. Not only did this index not come anywhere near a new all-time high during this reflationary period since 2009, shipping prices have actually made a new low below 2008 levels. The collapse, weak bounce, and new lows in Shipping prices simply serve as further evidence of the developing global economic depression. 


Real Estate

On a national average basis, home prices have not made a new high, either. The next leg down in the global deflationary depression will draw home prices to new bear market lows and the failure of this index to move to new all-time highs further exemplifies the secular bear market, the failure of the central banks' efforts to reflate and the much, much stronger underlying deflationary forces that are present.






Equities

Most markets have NOT made new all-time highs during this reflationary period. One of the only exceptions has been equities. Due to central bank inflation and manipulation, U.S. equity prices have carried to a new all-time high as reserves added to the banking system, rather than meeting their "intended" purpose of being lent out to the public, have been leveraged up by commercial banks and used for speculation, which has in turn bid up equity prices to artificial levels. I put intended in quotes because the intention of this phony inflation scheme was never for the reserves to get out into the public, but rather for the fraudulent central bankers to help their banker friends on Wall Street at the expense of Main Street. A truly sad situation indeed. However, despite this attempt at keeping the global ponzi scheme banking system afloat, natural forces will prevail and the equity market, too, will resume its bear market as the final leg of the supercycle bear market gets underway, within the context of the larger Grand Supercycle Bear Market that began in 2000. 




In Summary

All these markets are currently driven by liquidity, and the relative weakness in foreign markets and commodities is warning that all is not well on the global liquidity front. The depression will not become apparent to most until equities decline a long way, but Elliott Wave and statistical analysis are warning that the bear market is not over, and that another devastating leg down lies ahead. Stocks, commodities and real estate will likely all bottom together at the ultimate low, with greater than 90 percent declines in each of these asset classes occurring before the Supercycle Bear Market is finally over. As per "Elliott Wave Principle: Key to Market Behavior, "Declining "C" waves are usually devastating in their destruction. They are third waves and have most of the properties of third waves. It is during this decline that there is virtually no place to hide except cash. The illusions held throughout waves A and B tend to evaporate and fear takes over. "C" waves are persistent and broad"(Frost and Prechter, 1978).  The "C" wave that this excerpt is speaking of is in force in risk asset prices across the board, and should be textbook in its characteristics. 


Important Message

Although we are facing the biggest financial collapse in U.S. history, and the global economy is heading into depression, the most important takeaway is that nobody has to be hurt financially. It is VERY important to stay liquid in cash, OUTSIDE of the banking system. There will be runs on the banks, and it is absolutely imperative to get safe and take proactive measures BEFORE this occurs. For those that do, the positive in all of this is at the ultimate bear market low and bottom of the depression, there will be tremendous opportunity in asset prices across the board. 





Thursday, December 4, 2014

An in-depth Elliott Wave Analysis

With the recent move to new all-time highs above the September 19 high, I thought it appropriate to examine the Elliott Wave Picture. First let me preface this by saying the rally from the March 2009 lows is a bear market rally, not a continuation of the old bull market that began at the 1974 low, and certainly not a new bull market. This is evidenced by the absence of a value low that appears both at the price low as well as the inflationary/deflationary cycle low of every secular bear market bottom, as well as the fact that the rally from 2009 has occurred not only on low volume, but on declining volume the entire time. True secular bull markets exhibit, from an Elliott Wave perspective, impulsive rallies, and from a traditional technical analysis perspective, expanding volume. Neither of these characteristics have been present since March 2009. Consequently, there are two strong indications that this is not a bull market: The absence of a value low in March 2009, as well as the rally from that low failing to exhibit bull market characteristics. If either one of these factors was not true, I would reconsider, but rather it appears they are complementing each other in pointing to the same conclusion: This has simply been the longest bear market rally in history. Below please find an in-depth look at two different Elliott Wave Count possibilities of the Dow Jones Industrial Average from the March 2009 low:


Favored Count: Double Zig-Zag from March 2009 low:

This count has all but disappeared from the radar of Elliott Wave Analysts, but I still think it is valid, for a very important, yet perhaps by this point in time, vastly overlooked factor by the Elliott Wave Community: The clear lack of a five wave impulse from March 2009-May 2011. Instead, the market traced out a Three-Wave advance from the March 2009 up into the February 2011 high, and a Three-Wave advance from the March 2011 low up into the May 2011 high. Simply put, if this were an A-B-C zigzag, the wave structure from March 2011-May 2011 should have been five waves, but instead consisted of only three, indicating the orthodox top of the first leg of the rally from March 2009 was February 2011, not May 2011. Rather, what this wave pattern indicates, is that the market traced out a simple 5-3-5- zigzag up into February 2011, and then traced out a 3-3-5 expanded flat correction, From February 2011- October 2011. Also supporting this conclusion is the clear 5 waves down from the May 2011 high to the October 2011 low. If it were wave B (Circle), it should have only been three waves, but instead was an impulsive five.This would fit in nicely with the three wave advance from March 2011-May 2011, as wave (B) of X (circle). Remaining objective, what is less than ideal about this count, is the disproportionately large wave (C) of Y (Circle) relative to wave (A) of Y (Circle). Assuming this is correct, and the advance from March 2011-May 2011 was in fact three waves and not five, the aforementioned evidence rules out a 5-3-5 zigzag from March 2009- December 2014.


Alternate Count: Zigzag from March 2009 low:

While the preponderance of the evidence clearly argues against a zigzag from March 2009, it cannot be ruled out completely. An option that would allow for this count is a fifth wave truncation, ending in July 2011. However, this particular count denotes wave (4) as a failed flat, meaning wave c of (4) did not move below wave a of (4). Normally, when a flat correction truncates, it indicates a position of strength for the market. It would not therefore make sense, given the position of strength, for the subsequent wave (5) to truncate as well and fail to move above the high of wave (3). While this count is not favored for the aforementioned reasons, it cannot be ruled out nonetheless and therefore must be considered as a possibility. 



Below please find a chart of the Dow Jones Industrial Average from 2011 that clearly illustrates the three wave advance from March-May, and the five wave decline from May until October.




In summary, there are two working counts I am considering at the moment, both of which are presented above. There are others, both long-term and very long term, but as alluded to above the preponderance of the evidence does not favor them at the moment. Nonetheless, they will be considered should the market so dictate.


Monday, September 22, 2014

One for the Record Books

This juncture is one for the record books. Extremes in stock market optimism with the largest IPO in history, record low volume advances, weakening technicals, commodities breaking down under deflationary pressures with Gold and Silver near multi-year low;. Interest rates set to explode higher as debtors default on the mountain of unpayable debts worldwide, and the extremely stretched nature of this rally that began in March 2009, all point to a truly horrific financial crash and resulting economic depression, the likes of which we have never seen. It is truly amazing to me how long this market has held up. But the fact that it has gone on so long, and gone so far, only portends an even bigger collapse once the market tops. This time there will be no second chance, no bailouts, as it will be the entities at the very core of this decades long credit expansion that will need to be rescued this time around. The central banks, the commercial banks, and governments themselves will find themselves in deep financial straits once social mood turns down in earnest. Nature is comprised of cycles, of ebbing and flowing, expansion and contraction. The stock market is a reflection of the ebb and flow of collective human psychology, as it swings from one extreme to the other. Nature's laws apply to financial markets, too, and once the top is confirmed, the natural forces of the market will indeed assert themselves once again, and the entire house of cards credit structure will come collapsing down, correcting the excesses of the past 82 years since the 1932 Supercycle Low. This rally has gone on for far longer than most anyone anticipated, and is the most stretched rally in stock market history. The leverage in the system has reached absolutely unprecedented levels. This all being the case however, nothing has changed with respect to bear market phasing. The Grand Supercycle Bull Market in stock valuations topped in 2000, as I have reiterated many times before, and the past two reflationary periods have been nothing but credit induced, bear market rallies. This one is no different, but only of higher degree than the reflation that lasted from October 2002 until October 2007. So, it is no surprise that given this degree labeling, the rally has lasted longer and advanced further in percentage terms.






The Supercycle Decline that began in January/March 2000 is not over, and while anyone saying this is still just a bear market rally is questioned for their sanity, I still firmly maintain, This entire rally from March 2009 has been a giant, bear market rally, and will result in a decline to new bear market lows as the Grand Supercycle Bear Market enters the next phase of decline.


Thursday, September 11, 2014

U.S. Dollar Bull Market Update

I have always maintained, ever since I started this blog in the Fall of 2009, that the U.S. Dollar has been in a long-term basing process (see "Dollar doomed? Not so fast"   and Very exciting Juncture in the U.S. Dollar posts) and all risk markets, including equities, commodities, bonds and even Gold and Silver, were all topping out on a long-term basis. While the topping process, most notably in equities, has taken a lot longer than I anticipated, it has still been a topping process nonetheless, and NOT a "new bull market" as many so-called "analysts" claim. While risk markets are set up to fall a long way down, with most well on their way already, there is one market that is setting up for a super bull market and that is the U.S. Dollar. The Dollar has been the most hated market for many years now, with calls for hyperinflation based on "money printing", which is in and of itself based on a misnomer. The central bank has not been printing money, it has been expanding the stock of reserves in the banking system, and thereby increasing liquidity in the financial system. The massive reflation in risk markets has been a direct result of banks leveraging up the available money in the system to speculate in asset markets, thereby bidding them up. Yet, even with all the unprecedented measures taken by central banks around the world, commodities in general have remained below their 2008 all-time highs, gold and silver topped in 2011, and bonds for the most part, with the exception of some corporate issues, topped in 2012. This has all been part of the Grand Supercycle topping process that has been underway since the 2000 Secular Bull Market Top. Even amidst the greatest FED balance sheet expansion in history, and verbal pummeling of the U.S. Dollar, it has still held above the March 2008 low of 70.70. Further, the two significant lows it has made since that time, in May 2011 and May 2014, have each been at a higher low, a bullish indication. Additionally, at the most recent low of 78.91 in May 2014, the monthly MACD found support at the zero level, and has now turned up and triggered a buy signal. Often times before starting long term uptrends, markets go through a basing process. It is my estimation that this basing process has just ended in the U.S. Dollar, and ended on May 8, 2014 at a level of 78.91 on the U.S. Dollar index. Since that time, The U.S. Dollar Index has staged a very strong rally and hit a recent high of 84.52. A pullback can occur at any time, but this rally should be just the very beginning of a long Bull Market in the U.S. Dollar that continues far higher, and far longer than anyone expects. While there are no definitive targets available, I would not be surprised to see the U.S. Dollar Index above 300 by the time the bull market in cash tops out. Bond prices across the board, including U.S. Government Bonds, should fall for many years, while the U.S. Dollar should rise strongly in value during this period, as debt is repudiated and defaulted upon, wiping out debtors and creditors alike in the midst of the most severe deflationary crash in centuries. 









Friday, August 1, 2014

Mathematical Relationship Observation and Other Technicals

In Elliott Wave Analysis, analysts look for what are called 'clusters'. These are price levels where one or more mathematical relationships exist, and add credence to a particular target for a move. Earlier in 2014, I noticed a price cluster that may have significance.

My thesis is that the stock market has been in a bear market since 2000. There have been two substantial bear market rallies in stocks and subsequent reflations in the system. The first was from October 2002- October 2007, and the second has been March 2009 to the present. I maintain that both of these rallies have been bear market rallies within an ongoing secular bear market. The fact that both rallies have taken nominal prices to a new all-time high does NOT negate the secular bear market thesis. Both, however, have indeed gone to new highs in nominal terms.

Now to my discovery. Using intraday prices the 2007 high at 14,198.10 moved 20.83% above the 2000 high of 11,750.28.  Often times, the market will exhibit symmetry, especially between waves A and C of a correction. In this case, however, the market has achieved symmetry between two B waves of differing degree: primary wave B, and cycle wave b, respectively. An addition of 20.83% to the 2007 high yields 17,155.85. This in and of itself makes for a very interesting juncture at the moment, given that the market recently registered an intraday high of 17,151.56 on July 17, 2014. But, this becomes even more interesting when considering the 138.2% retracement level (a common stopping point for b wave rallies) of the 2007-2009 decline comes in at 17,150.25. Concatenating these two price relationships yields a price cluster of between 17,150.25 and 17,155.85. The current top is within within 0.08% of the lower target, and within 0.03% of the upper target. Also of note, the day of the intraday high, July 17, was also the particular day the market topped in July of 2007, before downtrending into an August low and staging one more rally before the final top in October of 2007. Very interesting to say the least.





Now some other technicals that are worth noting

Monthly Shooting Star Candle (Bearish Reversal Pattern):


A shooting star pattern occurs in uptrends when price closes at the low of the particular time frame (i.e. day, week, month, quarter, year). This is a bearish reversal pattern and alerts the analyst to a potential trend change from up to down. 





5-period RSI negative divergence similar to 2007:


The relative strength index (RSI) simply measures price movement relative to itself (prior moves). A lagging RSI indicator is a cautionary sign of a trend reversal. Notice the similarity between 2007 and 2014. In both cases, there were three points of negative divergence.


Monthly Broadening Top Pattern:




Throw-Over complete:



This long-term broadening top pattern is one I have been showing for quite some time and one that I still think is valid. Although there have been minor spikes above the upper trendline in 2014, none have been more pronounced than the one which has just been confirmed complete with a move back below the trend line.


There are no guarantees in the market, but this combination of evidence warrants extreme caution, to say the least.

While pinpointing can be difficult, there is one thing I can say with near certainty. This rally from March 2009, when complete, will yield the largest stock price collapse in at least 80 years, and probably the largest since the founding of the republic. This market is a house of cards, and when the ultimate top is confirmed, whenever that is, we should witness a very swift collapse back to the 2009 lows, at a minimum.





Tuesday, July 22, 2014

Reflections on the past 5 years: The FED, Central Banks and Financial Markets

There are a vast number of analysts who proclaim that the Federal Reserve Bank, and other central banks around the world, are in control, and that had it not been for the FED's aggressive and unprecedented monetary policy in the fall of 2008, and for a period of time after, the financial system would have fallen apart and collapsed completely. Further, many bears (including myself) who were vehemently against not only FED policy, but were strongly opposed to the idea that it would even be successful in preventing a financial collapse, have now been all but discredited, and many think the risk of a financial collapse and depression has evaporated and the FED has saved the day. I want to dispel two myths in this regard:

Myth # 1: The FED saved the day and prevented the complete breakdown of the financial system:

If anything, the actions of the Federal Reserve and that of Central Banks around the world have done nothing but put off the collapse, and turned an already unprecedented condition of over leveraged "too big to fail" banks and an over-leveraged system into an even more over-leveraged system, that has set up the entire financial system for complete and utter chaos once the liquidity cycle tops out and the inevitable reversion to the mean comes and natural forces of social mood take markets down. In short, the cure for too much debt is not more debt. Trying to cure the system with more debt is like trying to cure a crack patient with heroin. Instead, these geniuses at the FED and other central planners around the world have decided to do more of the same that helped get us here in the first place, and as a result have ensured an even bigger liquidity and banking crisis down the road. What has eluded me, as well as many others who are highly knowledgeable about the situation, is time. The lesson here is that extremes in financial valuations, and over leveraged systems, can go on for a lot longer, and become even more stretched, than might seem possible from the outset. In this case, the outset was the period from 1974-1982, when the biggest credit expansion in history was in its early stages. But, I must emphasize, the fact that the system has held up as long as it has, does NOT change the ultimate outcome, and, as we will see in coming years, the added leverage and debt in an attempt to prop up an already over leveraged system will only make the ultimate outcome even worse than if nature was allowed to freely regulate the financial markets.


Myth # 2: The FED is in control and "changed" the wave count.

With respect to the Federal Reserve Bank and financial asset valuations, many so-called "analysts" believe the FED sets interest rates, and, even amongst those who practice Elliott Wave Analysis, that the FED "altered" the wave count.

First with interest rates. Contrary to popular belief, the FED does NOT control interest rates. Please see the below chart, courtesy of Elliott Wave International:


As is clearly evident, The FED's interest rate targeting follows the market for 3-month U.S. treasury bills, not leads. My point in illustrating this is to prove that the FED does not decide what interest rates will be, but the global debt market does instead. And, I assert that the fact that this stock market rally and so-called "recovery" has gone on so long, and stretched so far, is not ultimately due to the FED, but rather to fluctuations in human collective social mood. If the bond market decided not to put up with the FED's unprecedented balance sheet expansion, the majority of participants would sell their financial instruments. This would drive interest rates higher, driving the value of the underlying treasury securities down, and thus the FED's balance sheet down. At the very least, it would strip them of any remaining credibility they had left, and, also quite possibly, and I think probably, forcing FED "set" interest rates higher even amidst a fragile system and weakening economy as confidence erodes away. The rising rates for already unsustainable debt levels would make both public and private sector debt unserviceable and we would see debt defaults occur in droves. In a sense, the subprime mortgage crisis is a microcosm for the entire system. It is one giant subprime mortgage, and once interest rates spike upwards, the debt will no longer be serviceable. Except this time, we are not dealing with the subprime housing market, we are dealing with the entire debt-based monetary system, and the implications are very drastic. The point in explaining these principles is to illustrate that the only reason the system has held up as long as it has, and that financial valuations and the underlying credit structure have become as stretched as they have, is that investors, who are humans, have put up with it. This, I contend, is due purely to the natural ebb and flow of human social mood, and simply serves as evidence of how big of a peak in social mood we are truly facing. These directors, which again are human beings, cannot control social mood fluctuations, no more than any other human being or group of human beings can regulate or manipulate the growth patterns of a tree. Tree growth is a system in nature, and the natural upward progression of human consciousness and social progress is also a system in nature. Contrary to many exogenous cause belief systems inherent in human beings, I believe many if not all systems in nature are endogenously regulated, or in other words self-regulated. They do not depend, nor are affected by any outside force. Since all systems in nature are subject to vibration, frequency, and fluctuation, many of them also exhibit fractal behavior, with self-similar patterns showing up in these vibrations or fluctuations at varying scales (i.e. timeframes). If one accepts the notion that systems in nature are self-regulating, then, it also seems logical to accept that financial market valuations, a result of the relative position of human collective feeling, or social mood, move on their own accord as well. Therefore, I assert that this upward trend in financial asset prices, and accompanying reflation of the credit money supply over the past five years, while encouraged by the FED, could not have happened without the trend toward a positive extreme in human collective social mood supporting it. And, the followed logical conclusion to all this, is that when the human collective social mood reverses into a trend toward a negative extreme, financial asset valuations, economic activity, and social and political conflicts will all follow toward a negative extreme.

Additionally, the fact that we as a society, unlike the financial peak of 1929, value financial asset prices in terms of debt-money IOU's, rather than real money, necessarily creates a resulting divergence between real (inflation adjusted) asset prices and nominal (assets valued in terms of debt-money U.S. Dollars ) asset prices, as should be expected. Using logic, If A is associated with C, and B is associated with C, the relationship between A and C (or ratio numerically expressed), and B and C (or ratio numerically expressed) is going to be different for the simple reason that A is not B, and B is not A. In this case, A and B represent Real Money that doesn't fluctuate in value (Gold) and credit-money (U.S. Dollars and many other central bank monopolistic currencies around the world), respectively. Continuing with this example and its conclusion, the relationship between A and C, and B and C, represent real (inflation-adjusted) and nominal asset prices, respectively. Since we have just shown that A does not equal B, the conclusion drawn from that using deduction, is that the relationship (or ratio) between A and C and B and C, will be different. Therefore, it is logical to conclude that the addition of credit-money to the system necessarily mandates, by logic of deductive reasoning, a divergence between real and nominal prices, which we clearly see present in the financial system today.

Using endogenous cause reality, the fact that we have been on a credit money system standard for decades now, rather than being a cause of how stretched the overvaluation and optimistic extreme has become, is rather a result of a peak in optimism so large, that it is concluding an uptrend in human social progress that has lasted centuries, and, looking back in hindsight, we will be telling our grandchildren about it.

 In conclusion, endogenous cause reality suggests that the extremity present in the financial system, is NOT ultimately a result of central bank action, and, if one accepts that notion, then it is also reasonable to assume, that once the trend in human collective social mood truly turns down (it has been in a topping process the past 14 years, evident by a number of different measures I have illustrated before. See prior posts), there is nothing the central banks can do to stop it, and the resulting asset price declines across the board.