Friday, September 9, 2016

A True Market Milestone

When I started this blog in the Fall of 2009, I never knew how profound its title would become. An Elliott Wave sequence consists of five waves in the direction of the one larger trend, and three waves against it. All throughout the years since I began writing, I strongly maintained that the rally in the U.S. Stock Market, as tracked by the Dow Jones Industrial Average, was a bear market rally and that the ensuing decline would be a resumption of the ongoing bear market. Given the technical and fundamental evidence at hand, I had almost, though not completely, ruled out an impulse wave. But it appears this year, the market has proven me wrong. The market has advanced beyond the acceptable lengths for a b-wave advance-161.8%  of the preceding decline is usually the limit. While I have kept an impulse count as an alternate, it was not preferred, due to the plethora of evidence that suggested it was a bear market rally. That being said, the global secular bear market that began in 2000, has certainly not ended, and is still ongoing.

The Dow Jones Industrial Average, by far the most popular and widely followed index, and thus the best barometer of the collective psychology dynamic, has traced out an impulsive five-wave primary degree advance since March 2009.  The above notwithstanding, other than the Elliott Wave labeling of the rally that began in March 2009, nothing else has changed, and the stock market is still in the Grand Supercycle peaking process that began in 2000. The wave that is terminating now is the fifth primary wave from the 1974 cycle wave IV low, the fifth Cycle Wave from the 1932 Supercycle wave (IV) low, and, as Robert Prechter points out, probably Supercycle wave (V) from the low of the last Grand Supercycle Bear Market in western civilization, which was measured using British Stock Prices, and bottomed in 1784. Below please find an updated Elliott Wave Count for the U.S. Stock Market, as measured by the Dow Jones Industrial Average.

                                             Primary Wave 5:

Wave Label Reasoning

Allow me to preface this section by stating that labeling waves since 2000, and especially since 2009, has proven to be extraordinarily difficult, due to the highly unprecedented nature of current market dynamics.

It is understandable and perhaps even expected that Elliott Wave Analysts should balk at the idea of placing the orthodox end of intermediate wave (1) at the 12,753.89 high in July 2011 rather than at the 12,876 high in May 2011. After a failed flat for wave 4 of (1), which usually indicates strength in an uptrend, it is highly unusual for a fifth wave to truncate, or in other words fail to make a new high. However, it appears appropriate in this case due to the fact that there is no clear completed impulse pattern from March 2009-May 2011, as well as the fact that if one were to label the orthodox top of wave (1) in May 2011, the move down from May 2011-October 2011 would count as five waves, which is a definite rule breaker for a corrective wave (2). At first glance, labeling the end of wave (1) may appear apt, with the move from the March 2011 low at 11,555.48 to 12,876 in May 2011 being the fifth wave. But, the issue lies within the supposed fifth wave itself. Within an impulse, all subwaves must themselves contain five waves. As per Elliott Wave Principle by Frost and Prechter, "...each subwave 1, 3 and 5 is a motive wave that must subdivide into a "five", and each subwave 2 and 4 is a corrective wave that must subdivide into a "three" (EWP, p. 23). In this case with intermediate wave (1), however, the assumed fifth wave is only composed of three waves, and not the required five to make it a valid impulse wave. Yet another way to label the move would be an expanded flat for wave (2), beginning in April 2010, but here again, the move from March 2011 to May 2011, wave c of B in this case, is not itself composed of five waves. Please see below for a visual of what is being alluded to:

Consequently, the only valid way to label the move from March 2009 to May 2011 is Minor Waves 1 through 3, with May 2011 marking wave b of an expanded flat for Minor Wave 4 The only issue lies with the fact that wave c of the expanded flat truncated, yet the subsequent wave 5 did not make a new high. Normally this would be considered invalid, but the Elliott Wave discipline is one of assessing relative probabilities, and it appears to be the best option given the qualitative evidence at hand. Of note, however, is the fact that the Dow Jones Transportation Index, a very important barometer of economic activity, consisting of companies transporting the nations' goods, made a new high in July 2011 as well. The fact that the Dow did not was a classic Dow Theory non-confirmation, and was warning of an impending decline. The Nasdaq 100 index did register a new low for wave c of 4, as well as a  new high for wave 5. This is not a justification to unequivocally say the impulse  pattern presented is valid, but it does, in my estimation, lend credence to the aforementioned wave count. If the orthodox top of wave (1) is labeled at the July 2011 high, that would make the move down to the October 2011 low a clean zigzag pattern, with wave C of (2) being an ending diagonal, which seems consistent with the end of a second wave. An ending diagonal sets the market up for a powerful move in the other direction, which again is consistent with the beginning of wave (3). Wave (4) in my judgement is best labeled as a double three combination correction. The alternate would be a double three combination composed of a zigzag for wave W, and a barrier triangle for wave Y. The barrier triangle option is not favored due to the fact that the Dow is the only major index that did not trade below it's 2015 low, on an intraday basis, in 2016, and a rule of triangles is wave C cannot move beyond the end of wave A. A common Elliott Wave count has the low of wave (4) in October 2014 at 15,855.12. This count is not favored here because the move from October 2014 to May 2015 is three waves, and not five. This suggests the move is part of an ongoing correction rather than an impulse wave. Please see below for a detailed wave count for Intermediate Wave (4):

I would be remiss if I did not mention the fact that, back in late January of this year, 2016, the Dow had formed a near perfect channel, with a line connecting the highs of waves 1 and 3 running parallel to a line connecting the lows of waves 2 and 4. I myself had shown this very channel, near the low of wave (4), but failed to recognize it as such. Sometimes, the simplest answer is the correct one, and that was certainly the case this time. The good news is, that channel is still very much intact and should be useful for the remainder of the bull market. As R.N. Elliott, the founder of Elliott Wave Theory himself noted, "Elliott noted that a parallel trend channel typically marks the upper and lower boundaries of an impulse wave, often with dramatic precision" (EWP, p.71). Below please find an updated chart illustrating the impulse channel that the market has created.

The Dow has been in a Cycle Degree Bull Market since December 1974. For a long time, I had maintained that the bull market ended in 2000, with an alternate count implying it had ended in 2007. Only as a second alternate, in order to remain objective, was an impulse count presented that suggested the bull market was still ongoing. Given the current structural evidence at hand, however, it does appear that the bull market never did end, and instead will make its final high with the rally from the 2009 lows. If one studies the following chart as it pertains to the guidelines of Elliott Wave Theory, it would not seem right to label the March 2009 lows as Primary wave 4. However, it appears that an expanded flat correction unfolded from January 2000-March 2009, and expanded flats are consistent with a fourth wave. The fourth wave, then, served to relieve the overbought condition of the market since 2000. To be clear, it has not properly relieved the overvaluation that was present in 2000. That move from overvaluation to extreme undervaluation is coming once the bull market in nominal stock prices, the last holdout of the Grand Supercycle Bull Market itself, finally ends. Perhaps a justification for the fact that the fourth wave was unusually deep is both the shallow, sideways nature of the second wave, during the bottoming process. Now the market is topping after Primary wave 4 as part of the Grand Supercycle topping process. Although unusually deep, the volatile Primary wave 4 alternates well with the relatively shallow and sideways nature of Primary wave 2. On a fundamental level, the main driver for this Cycle Wave V bull market has been credit inflation and liquidity expansion, encouraged by central banks around the world. These dynamics were not occurring on any comparable level following the Cycle Wave II low in 1942. In 1971, President Nixon closed the gold window, which cut the final link of the U.S. Dollar to Gold. The only new dynamic that began unfolding after the March 2009 low was QE, which is really just more of the same credit pushing that the Federal Reserve Bank has done since its inception in 1913. While not strictly quantifiable and defensible, it would appear that there would need to have been more of a fundamental change in the monetary and banking system dynamics for the 2009 low to have represented a Cycle or Supercycle degree low. Luckily, there are other metrics that do prove 2009 was not a "generational low", such as the P/E ratio and Dividend Yield, as alluded to many times before on this blog. They simply were not anywhere near levels consistent with a secular bear market bottom.Thus, it is reasonable to conclude that the bull market that began in 1974 did not end, but rather paused between 2000-2009, during which time the market traced out an expanded flat correction, in preparation for the final wave to new all-time highs to cap the Grand Supercycle Bull Market.

 Still further evidence for an ongoing bull market, is inflation-adjusted stock prices, which have made another all-time high, and which made a new low in 1982, even though in nominal terms, the Dow's bull market had already begun in 1974. In 2009, the inflation adjusted stock prices had been in a downtrend for 9 years, since the overvaluation peak of 1999/2000. The fact that stock prices on an inflation-adjusted basis made a new low in 1982, amidst a known secular bull market and had a substantial setback from 2000-2009, lends credibility to the idea that both were within the current secular bull market in U.S. stock prices, especially when the relatively shallow nature of the setback that inflation adjusted stock prices had from 2000-2009. The next peak in stock prices will be the final one in the Grand Supercycle topping process and will include both inflation adjusted stock prices as well as nominal stock prices, very similar to 1929.

The stock market is completing a Supercycle Degree move, and probably the Grand Supercycle that began at the founding of the United States. The fact that prices have remained above the supercyle channel for so long, and the asset mania has gone so far, simply serves as evidence of just how big of a top the stock market has been in the process of forming. 

Timing of the Grand Supercycle Top

Now that we have established that the Cycle, Supercycle and Grand Supercycle bull market never ended, when might the market finally top? If we gather the weight of the evidence to portend a top of Grand Supercycle degree, when might the final peak actually happen? Clues are often found in the Fibonacci sequence, and the relationships between major turning points in history. As alluded to above, the low in British Stock Prices, was in 1784 after a 64-year bear market following the peak of the South Sea Bubble in 1720, the last Grand Supercycle top. Because U.S. Stock data only goes back to the mid to late 1800's, we need to rely on another data source for the Elliott Wave position of western civilization prior to the founding of the United States. Hence using stock prices in Great Britain, which originally founded the 13 colonies. The data was compiled by Elliott Wave International. If the year 1784 was in fact the start of the current Grand Supercycle advance in western civilization, we might conclude that the peak in the final holdout of that bull market, U.S. nominal stock prices, will occur a Fibonacci 233 years from 1784, which is 2017. This would also mark an 8-year bull market from March 2009, the same number of years that occurred in 1929, the last Supercycle top. However, the one caveat here is that unlike counter trend waves, which are limited as to their allowable entrancement, impulse waves can extend, and go on far longer than anyone thinks. The most recent example of this is U.S. stock prices in the 1990's. The market kept subdividing and subdividing, until the final peak of the overvaluation in March 2000. Since the market is about to register a Grand Supercycle high, there is no Elliot Wave rule saying it can't extend further in time and price, although given the global financial picture, it is unlikely. Nevertheless, in order to remain objective, should the market choose to stretch the bull market even further, we might look for a top in the year 2022, which is a Fibonacci 13 years from 2009, and a Fibonacci 233 years form 1789, another acceptable starting year of the Grand Supercycle in western civilization.

From October 9, 2002 to October 11, 2007, on a closing basis, the market rallied for exactly a Fibonacci 5 years. If the following rally, from March 9, 2009, were to rally for a Fibonacci 8 years, the next number in the sequence, the market would top on or about March 9, 2017. The year 2017 is certainly compelling for a top from multiple mathematical and historical standpoints. We'll just have to see. 

Bull Market Aftermath and Macro Picture Observations 

 As shown before on this blog, the valuation peak was 2000, the peak in credit inflation was in 2007/2008, and the final peak in the 16-year topping process to date, will be the liquidity peak, after which time, the phony debt-based financial and monetary systems will collapse under their own weight. 

The fact that global central bank have supposedly "held down" interest rates is commensurate with the degree of a top we are forming. But, the myth that central banks control interest rates is just that, a myth. As illustrated by only a handful of analysts, the FED does not "set" interest rates, but rather follows the short term t-bill market for clues on what to do. Therefore, rather than the FED "keeping interest rates low", it has actually been the market which has simply not demanded high rates of interest for the opportunity of keeping their money in perceived safety with governments. While this may seem like a ramification of pessimism and an excuse by market and economic pundits to claim when interest rates rise, it will be reflective of an "improving economy", upon closer examination and deeper analysis, such is not the case. Please CLICK HERE to view a prior blog post explaining the true dynamic of FED operations, and why the FED is not omnipotent.

For debt instruments, interest rates move in the opposite direction as prices. As the price rises due to increasing demand, the interest rate falls. While it is true that The willingness of lenders to keep their money with governments at such low rates, or even paying  the government in the case of negative interest rates, to keep their money in an entity perceived as safe, it is not the only reason interest rates are low. Interest rates on other high-yielding instruments have in recent history gotten to historically low levels, too, and thus the prices high, and that is reflective of optimism. The fact that investors are trusting governments, who are notorious for stealing from the public through inflation and taxation and wasting the money, is also reflective of a complacency in that regard, albeit much more suttle than the manic overvaluation peak of 2000. Which brings up another point. The system has been held up over the past 15 years by credit inflation and liquidity expansion. This has manifested itself in overvaluation first in tech stocks, then the blue-chip stocks, followed by commodities, and when that fever ended investors jumped to bonds, after getting tired of being burned. A noticeable pattern is found in the progression of markets where investment manias are present. Since 2000, when the global deflationary secular bear market began, and with it the Grand Supercycle topping process, bubble after bubble has been inflated by the market, but a thoughtful analysis will reveal each one has gotten progressively more conservative. Additionally, this type of  reasoning has each time been used as an excuse as to why "this time is different" with each successive mania and to thus rationalize buying into each one. Starting with the tech bubble, stock in companies can become worthless and go to zero,especially tech startups with no earnings and no history. When people lost their retirement in that because they had bet the farm, they moved into housing, because everyone needs a house, right? When investors found out the answer the hard way, they decided to move into blue-chip stocks, because they have a long history and couldn't go down. Well many companies in the Dow did go down, some a long way. Then as 2008 approached investors shifted their focus to commodities, because the world always needs commodities. The CRB index of commodities, proceeded to collapse 67%, from peak to trough, so far, and as shown before, is now below the 1999/2001 lows. Now, investors "get it". They understand they shouldn't risk money in risk assets, so they have turned to bonds, because bonds are safe investments. But the irony is, the bond bubble is the biggest of them all, and when it bursts, it will bring down the entire financial system with it. Nevertheless, The Elliott Wave Principle and the psychological dynamic of financial markets, has taught us that when it comes to finance, perception becomes reality. With the perceived safety in bonds, bond prices continue to be bid up, hence the continued move to historical new lows on government bond yields. The answer as to when the bond bubble will burst is when collective psychology finally turns for good, and the Grand Supercycle Bear Market truly begins. In 1929, bonds crashed right along with stocks, and that is the real reason why the FED "let it happen". The central bank gets harsh criticism for tightening credit conditions in the 1930's during a financial panic, and that is given as a reason why the depression was so severe, when in fact, unbeknownst to most, the FED simply takes cues from the market for treasury bills, as to where to "set" interest rates. So, Rather than the FED "choosing" to be asleep at the switch in 1929, it was the Supercycle degree top in stocks, coupled with a bond market collapse, along with the stock market in 1929 amidst a secular deflationary cycle, that was responsible for the severity of the financial panic and resulting economic depression. This time, rather than markets peaking together, it has been a much longer and more drawn out process, because the financial top that is coming is of one larger degree, a Grand Supercycle degree bull market that began in the 1780's, right after the founding of the republic.

As this update nears its end, I wanted to touch on something important yet widely overlooked, and that is the concept of dis-inflation. The true commodity bull market ended in January of 1980 after the stagflationary 1970's cycle wave IV secular bear market in stocks. From that point forward, there was dis-inflation, a time when commodity prices were falling, and speculation ran rampant asset prices went to manic levels. Following the dis-inflationary bull market, comes a deflationary bear market. It was all on track to begin in 2000, then again in 2007-2008, but when that didn't occur and with stock prices now at new all-time highs, it appears that dis-inflation and a commodity bear market has been going on the whole time, since the early 1980's, when the cycle wave V bull market accelerated, and the great asset mania began. We have never witnessed such a divergence before between commodity performance, which is clearly signalling all is not right in the global economy, with U.S. Stock prices. That gap will be closed, and while commodity prices could rally in the short-to intermediate term, the natural forces of the market will take over, and global bond commodity and stock prices will collapse together into a final secular deflationary low. It is a truly amazing dynamic to watch unfold, as the global secular deflationary bear market is in full force, but U.S. stock prices are going parabolic, as the last holdout of the Grand Supercycle Bull Market. We are living in unprecedented times, with the greatest financial and monetary experiment in history unfolding. The ultimate resolution will be a stock market collapse of historic proportions, and we are going to see things happen that have never happened before in financial history. 

So what is going on with these mixed signals in the current financial juncture? The fact that the debt markets are giving off mixed signals is representative of the financial topping process that began in 2000 with the bursting of the tech bubble. Optimism is slowly dissipating as the fundamentals deteriorate further, and at this point are rotten to the core. Meanwhile, investors are searching for yield in high-yield instruments, but are going to end up losing their principle once the deflationary forces truly take hold, and credit once again freezes up, with borrowers defaulting on their debt in droves, and businesses declaring bankruptcy, bond issuers can and will default during the next deflationary collapse, and as explained above, that is likely to be sooner rather than later. While an ideal time target for the final high in nominal stock prices has been set to 2017, the market does not always conform to expectations and is technically weak and vulnerable, with many stocks already in bear markets. The stock market is at great risk, and staying invested for the final waves of the bull market does not carry a favorable risk/reward ratio. The warnings given before on this blog have not changed. It is important for long term investors to seek the safest possible stores of value until the bear market runs its course. 

Even though investors as a whole will never learn, and humanity keeps repeating it's mistakes of the past, there is undoubtedly a progression of becoming more conservative, and by the end of the global bear market, investors will be so off-put by stocks, they won't even want to hear the word. This extreme financial pessimism will serve to counterbalance the many years of financial excesses, and the overshoot on the downside with respect to market sentiment is completely necessary to satisfy nature's law of long-term equilibrium as it relates to humanity's progress in fractal form, as beautifully illustrated by the Elliott Wave Principle.

Wednesday, January 20, 2016

Update and Outlook on Markets with Important Message

It's official. 2016 has gotten off to the worst start ever. The first week saw the Industrials decline -6.2%. The old Wall Street adage, "as goes January, so goes the year" will likely apply this year. And, 2016 is likely to witness record volatility in markets as the global bear market and deflationary depression accelerates. In my last update, I entertained the possibility of one more new high, but offered a count that had the rally complete in May 2015, at which point the markets almost precisely hit my calculated targets. The piece I wrote back in May 2015 which illustrates my work on these ratios can be found by CLICKING HERE.

On my last post, found by CLICKING HERE, I entertained the slight possibility, in order to remain objective, that the Bull Market from 1974 never ended, and was completing now. That possibility has now been virtually eliminated, as the market has not completed an impulse up from the 2009 lows, bur rather, as I have been alluding to for years, a 3-wave, corrective, bear market rally.

Despite the new all-time high in nominal terms, and indeed in inflation-adjusted terms as well, I remained firm that the entire rally was one giant, corrective structure that was bound to fool market participants into believing a "generational low" was in place in March 2009 and a new bull market had begun. Indeed, this is the goal of any bear market rally. And. this one sure accomplished the goal of fooling the vast majority of market participants and economic commentators into believing the worst was over, and we were recovering from the "great recession".  The tech bubble that burst from 2000-2002 and the resulting 78% decline in the NASDAQ was NOT the end of the bear market. The Financial collapse from 2007-2009 was NOT a "great recession". This was NOT an "economic recovery". Instead, it is just the beginning, in terms of price, of the most severe bear market, financial collapse and economic depression since the founding of the republic in the 1700's. Now that the topping process has lasted so long, and we can say with near certainty the larger bear market that began in 2000 has resumed, and considering the secular deflationary cycle has already been going on for 15 years, this leg of the bear market should be the most breathtaking yet. The imminent crash should be swift, to complete cycle wave c into the final bear market low of the cycle. However, the bottoming process, once the final low in price is in, should take longer than most expect. Just like the topping process took a long time, so should the bottoming process. Perhaps not in terms price itself, (due to the fact that bottoms tend to be more of an event vs. a process, whereas topping action in prices tends to be more of a process), but rather in sentiment. After the third financial collapse of the past 20 years, people are likely to be so put off and opposed to the idea of investing in stocks, that they will advice those in future generations not to go near the stock market. And, the resulting negative mood vibe in society is likely to persist far longer than almost anyone expects, even after stock prices have put in a final bear market low. This persistence of negative mood would serve to counterbalance the unbelievable persistence of optimisms that has accompanied the Grand Supercycle Top in stock prices.  I have covered extensively analysis of the economic and financial situation in recent posts, as well as technical reasons for the internal structure of the rally, so there is no need to go over all of the details again, but to recap, please see below for the internal structure of the rally from 2009, a triple zigzag upward correction, and the projections going forward for the remainder of the bear market.

Short-term, the market is oversold and it is interesting how the market recognized the lower trend line of a parallel channel connecting the tops of the first zig-zag in May 2011 with the May 2015 top:

Longer-term, the market is likely to trace out a series of impulse waves in a giant c wave, until the final bear market low, early-to-mid next decade.Please note these projections are not necessarily drawn to scale.

Now, in the short to intermediate term. Once wave 2 of (3) completes, the decline should turn from orderly, into disorderly. In fact, I would not be surprised to see a substantial market dislocation, and a violation of the 2009 lows in short order.

Notice the series of Head and Shoulders patterns setting up:

2008. Notice the truncation of wave 5 of (1) in 2008, similar to 2015:

Finally, the expected wave structure. This is an ideal approximation, and not an exact prediction of what how the bear market will play out. What is certain, is that absolutely unprecedented volatility is likely to hit global markets, and financial markets will set records for bear market activity.

Gold looks to be setting up for the biggest rally since the 2011 top, but, it will only be a bear market rally, and not a new bull market. Ideally, in order to realign with equities, Gold's rally should occur during Primary waves 1 down and 2 up in equities, then during Primary wave 3 all assets, including bonds, crash together as forced liquidation and margin calls occur and anything and everything is sold to raise cash in order to satisfy debt obligations and conduct daily transactions. Again, this is not necessarily drawn to scale.

Crude Oil has been in a bear market since 2008. Oil has been decimated and is now below the 2009 lows. It is lost 81% of its value since the all-time high. A rally can occur at any time, but the ultimate target is below $20 per barrel.

Commodities have been in a bear market since 2008. The bear market has been brutal as the CRB Index of commodities is now down 67% from the all-time high in 2008 and is now below not only the 2009 lows, but the 1999/2001 lows as well.

Both Commodities and Oil topped in 2008. 2016 represents a Fibonacci 8 years from the high, as well as a Fibonacci 5 years from the counter-trend rally peaks in 2011. This suggests a significant low will occur this year in these markets. However, it is not likely to mark the final bear market low for commodities.  

The housing collapse is NOT over. House prices on average, nationwide, should be down 90% from the top in 2005/2006.

I do not care what any pundit says, this is cold hard data, and it suggests these markets are falling because of demand destruction and deflation, as well as suppliers continuing to produce despite low prices, in order to satisfy debt obligations. Many oil and commodity producers will go bankrupt, and, along with a myriad of other credit problems in Student loans, housing, and auto loans, will once again freeze up credit markets and cause a banking crisis. Stocks have been the last holdout, and they, too, are now collapsing under the weight of too much debt and an ongoing secular bear market.

Finally, the most important part of this all:

Most people are not and should not be traders, and during the bear market period, far more important than return on capital is return of capital. Stay in the safest possible cash or cash equivalents. There is always the risk that governments will try to confiscate cash, but there are alternative cash equivalents that are relatively safe.

If you are reading this blog and unsure of what to do, contact me at the above e-mail address in the upper right hand corner of this blog. I cannot give investment advice as I am not a registered investment advisor, but I can suggest ways to stay safe during the bear market. This bear market is so severe, with such wide and potentially devastating implications, and it is so important that people act NOW to protect their wealth, that I do not charge at all. Simply e-mail me.

Those who act now can prevent personal financial devastation. Bear markets unfold faster than bull markets, and with the baby boomer generation getting ready for retirement, there is no time for political correctness, to "wait it out" like financial advisers will tell you. DO NOT listen to the financial media with their propaganda and the fools they have on, telling you how cheap this market is. The Bear Market has no mercy, will crush anything in it's path, including any portfolio that is not properly positioned for safety.

  It is absolutely imperative that people get safe now before it is too late.

Thursday, January 7, 2016

A Treatise on Government and Society

Happy New Year. Thought  I would start off 2016 with something completely different: A Treatise on Government and Society. 2016 looks to be a historic year in markets across the globe. Updates coming periodically throughout the year.

Greed can't be legislated away, there are no shortcuts. 

The only solution to corporate greed, is human social progress. A microcosm of this principle can be found in the average household. When family members are young (children) they behave immaturely. As time goes on, and they grow older, their behavior starts to change in a positive way. The same can be said of societies. When they are at their infancy they are relatively immature. As they mature it's people become more civilized. Past a certain point, however, the cycle peaks and society goes into decline again until it collapses and a new society emerges from the remnants.  

 Case in point, we aren't cavemen anymore, and have obviously progressed immensely from this point in time, both in intelligence, and civility. Natures fractal pattern of growth suggests life will one day progress to the point where there need not be competition anymore, but a society where beings work together to accomplish common goals, rather than competing with and harming each other and wasting resources in the process. 

A lot of people think that corporations are evil, and selfish. That's true with some of them, but that's human nature. We are geared towards survival, and aren't progressed enough yet as a species to put other's interests before or at least on the same level as our own. In the meantime, this is the question:

If groups of people (corporations) are who we are supposedly trying to protect the public against, why would we want to give any human being or any group of human beings power over other human beings? it makes no logical sense. Logic suggests that if corporations inflict X amount of damage on people, governments inflict far greater damage, because they have a monopoly on power (lawmakers) and a monopoly on force (police). It's like asking the wolf to guard the hen house.

Nature is cruel, and humans are part of nature. The best we can do is let natures cycles and patterns work within the human race, with free people. A lot of pain and anguish, but also a lot of good in the world, too. That's what nature is, expansion and contraction, good versus evil, Yin versus Yang. 

Government does not lessen the burden of any of these fundamental flaws, just redistributes it, while taking a cut of all the production "commission" in the form of taxes. In fact ,the government itself is a corporation. 

 Contention is, for every bit of "good" government does, there is an equally detrimental effect on society with something else it does, because there ain't no such thing as a free lunch, and no socialist leader can wave his magic wand and change that. Not advocating anarchism, but the role and function of government and regulation needs to be reexamined, it has gotten far out of hand, and the ballooning of the size of government is a lot of the reason why we are in this mess in the first place.

Have hope that one day the human race will wake up and realize we don't need a leader. The notion that we need a leader, a "Shepard", has been hard wired"in our belief systems for many millennia. But nature's dynamism suggests this could one day change. What's the old saying, "Change is the only constant." Maybe it will never change while humans are humans and not some other species. But truly do think that one day, perhaps many millennia from now, living beings on this earth will not feel they need a leader. 

In the meanwhile, we should let the market work. Problem is, the free market is blamed when in fact we haven't actually had a free market for a long, long time, and arguably never. In recent history the power was given to a cabal of bankers and their friends. This is the problem, consolidation of power. We need de-consolidation of power, smaller government, and letting nature run its course. Had we let the banks fail we would be much better off today. Government stepped in to supposedly save the system. But what they were actually saving, were their bankers friends on Wall Street, at the expense of main street. Had the market been allowed to function the excesses would have been worked off in 2010 and 2011. Instead the can was kicked down the road to create an even bigger crisis down the road. 

Goes back to no shortcuts. Government regulation is an attempt to stymie the effects of corporate greed, but, it doesn't. In fact, more often than not Government is a leveraging tool by the very people they claim to be "regulating". Had it not been for Government, the Federal Reserve Act of 1913 would have never been passed, and the criminal banking cartel would not have the monopoly on money they do today through the FED, and society would be rich instead of impoverished through a 99% devaluation of the USD. Government regulation does not work, but the prosperous times of the 1990's made it look like it did. We were prosperous despite government regulation, not because of it. 

Thursday, October 29, 2015

Thoughts on the Elliott Wave and Macro Picture

Upon examination of the Dow Jones Industrial Average, the most likely conclusion is that the great secular bull market which began at the December 1974 low ended in the first quarter of 2000. Supporting evidence for this structure, as illustrated before, can be derived from the measure of the market valued in real terms, or Gold. It peaked in 2000 and even at the recent high, after over 6 1/2 years of a rally in nominal terms, has not even come close to those levels since in real terms:

Additionally, evidence that 2002-2007 was nothing more than a bear market rally can be derived from the failure of the market to make a new high in anything other than dollar terms. This suggests that real stock values were falling, and it only appeared as though stock values were rising because of the false measuring unit, the U.S. Dollar. Gold is real money, and the dollar is not, but rather a debt instrument that is built on a giant inverted pyramid. Please see prior blog posts for more on this phenomenon. I have also laid out clear technical evidence for this rally since 2009 being a bear market rally, or a rally in the context of a secular bear market. Again please see prior posts for a detailed analysis.

The most probable scenario is that the Bull Market ended in 2000, illustrated below:

It is highly unlikely that the Bull Market ended in 2007, due to the fact that evidence suggests the entire rally was based on credit inflation and the drop in the value of the U.S. Dollar. It was much more likely a B wave of an expanded flat correction from 2000. Expanded flats are a corrective wave form, and this one was either the first leg down of a bear market (most probable), or a fourth wave correction.

If it represented a fourth wave correction, the it was either of primary degree or cycle degree.

The bear market from 2000-2009 was too small to indicate a correction of supercycle degree, in addition to the fact that, as illustrated before, valuations were simply not indicative of a secular bear market bottom on a historical basis. This was also the case in 2002, which wasn't a secular bear market low either. Therefore, the 2009 low indicated either Cycle wave a of an ongoing supercycle bear market, or Primary wave 4 of the bull market that began in 1974. Although evidence doesn't support the latter count, it is important to remain objective.

Yet another possibility, presented by Patrick, a member of a private investor group, is that the bull market is still ongoing, but counts the 2002-2007 bull market as an impulse wave:

One last possibility, I discovered while constructing long-term Elliott Wave channels, is that the Bull Market is still ongoing in cycle degree. This would mean 1974 did not mark a cycle degree low, but rather a low of primary degree, and 2009 marked a cycle wave IV low. Supporting this potential count is the fact that the advance from 1932 channels well (EWP, p. 71), with the exception of the period between 1974 and the mid-1980's, where price remained below the lower trend line. This count would not be completely outside the realm of possibility, considering this period of time the market spent below the lower trendline was a period of deep skepticism of the market's ability to advance. Meanwhile, during early 1980's,the market was tracing out clear impulse patterns in a true secular bull market. Perhaps the primary reason I decided to present this possibility is the clear alternation between wave II and IV, satisfying the guideline of alternation.

Despite my convictions that the bull market ended in 2000, I have presented three alternate ways of interpreting the market from an Elliott Wave Perspective, in both Cycle and Primary degree. The post directly preceding this one, found by CLICKING HERE, included a detailed quantitative analysis of the market and presented the recent high in May 2015 as potentially marking a very significant high. This would be especially relevant if 2000 was indeed the end of the great secular bull market that began in 1974, as it incorporates the two rallies in this secular bear market period. If the secular bull market is still ongoing, the ratios presented in that analysis would no longer be valid, because 2009 would have marked a new leg in the ongoing bull market, but NOT a new secular bull market. This serves to complement the new high that would likely accompany the market, as the existing high would be surpassed, negating the current mathematical basis for termination of the rally.

 Internal Structure of the rally assuming calculated ratios hold:

Triple Zigzag correction from 2009:

One last possibility for the corrective count that would allow for a new high, and possibility still the validity of aforementioned ratios, is that the last leg of the rally topped in September 2014, and the May 2015 high was a b wave as part of an X wave separating the second zigzag from the third. The market would then stage a dramatic downward reversal after a minor new high.

I detailed in a post back in 2014 why, from a pure Elliott Wave Perspective, the internal structure of the rally did not count well as an impulse. This would serve to refute the rally that began in 2009 as a bull market.  Please see a link to that post below:

However, again remaining objective, should the market start impulsing up from the August low, it would likely be a fifth wave in intermediate degree from 2009, and the ensuing high would represent the top of Primary Wave 5, Cycle Wave V, Supercycle Wave (V) and finally finish off the Supercycle Bull Market. In this scenario, the market could accelerate upwards, ending with a blowoff top into 2017 to complete a Fiboncacci 8-year bull market, just as in 1929.

No matter how one counts the advance off the 2009 lows, the rally is terminal and the market is approaching a VERY significant top, following which should be a dramatic deflationary collapse that takes the majority of economic and financial commentators by surprise. The decline will go down in history as being the most significant in United States History to date.

Once again, we have a situation where a cyclical market bottom is being proclaimed throughout the investment community as a "generational low". It wasn't a generational low, and nor did it serve to properly correct the excesses that have built up throughout the 1980's, 1990's and early 2000's. What has occurred, is that central banks have attempted to solve the debt problem with more debt. We haven't solved any of the debt issues, but rather made them bigger. First, from 2002-2007 in the private sector, and now in the public sectors, educational loan sector, and auto loan sector. All of these are bubbles that will end the same way as the housing bubble, in total disaster. Except this time,the whole fraudulent debt-money system will collapse, and central bankers will be powerless to stop it.

Some proclaim the next crisis won't involve a banking crisis, however it would appear that evidence points to the contrary. Banks and companies are leveraged up again just as they were before the last crisis, except this time, both with debt and their own stock, repurchased on leverage. When the tide turns for good, forced liquidation of securities and major liquidity issues will once again present themselves. The banking system nearly collapsed in 2008. This time around, it will collapse. Because this is a developing Grand Supercycle Bear Market, social mood will reach such deep lows that will witness economic damage, social and political unrest  FAR  worse than anything seen during the 1970's secular bear market, and is likely to prevent any more bailouts, especially of private institutions. Political tension, from both the far left and far right, is currently increasing to institute major change. This tension will only become tighter and the backlash even more severe as the initial supercycle collapse, in progress since 2000, concludes. This final portion of the supercycle collapse, cycle wave c, will take the market below the 2009 lows. It will be breathtaking, and we will see things unfold in financial markets that have never before been witnessed since the inception of the Dow Jones Industrial Average in 1896, including absolutely unprecedented volatility and confusion as investors panic.

The Bull Market in valuations certainly ended in 2000. It is abundantly clear that optimism has stayed elevated throughout this whole 15-year topping process, with the exception of the late 2007- early 2009 period. The secular bull market certainly ended qualitatively in 2000 with the peak of true economic growth. As illustrated before, the bounce into 2007 was based on credit inflation, masking the collapse in real values that was taking place. What didn't end, is the topping process and elevated optimism. Some might say the 2007-2009 period was enough to qualify as a supercycle bear market, as it represented the largest percentage decline since the last supercycle low in 1932, suggesting it could have corrected the entire supercycle advance from 1932. From a pure quantitative perspective, this is true, but bear markets represent more than declines in the stock market. Secular bear markets serve to correct systemic excesses, and in this case, the highest degree of debt excess in history. Additionally, true secular bear market lows always include undervalued markets. This secular bear market has not accomplished it's goals yet, and if anything, the central bank's interference has extended the already insane levels of optimism and debt. From a causal perspective, however, rather than the central banks "causing" the extended rally in the stock market,the degree of a peak that is developing, a Grand Supercycle peak, is consistent with central banks tampering with credit and trying to hold an unsustainable system up.  Put another way, rather than central banks manipulating people to take on more credit, a society that is developing a large peak in economic progress exhibits unusual and historically extreme optimism, which thus allows central banks to exist and inflate. While there was no crystal ball in 1982, and no analyst could have known for sure just how far and how long the mania would go on, the current juncture, rather than being viewed as bizarre or impossible, should actually be expected and embraced, as it simply serves to confirm the exceptionally large degree of a top that is developing, just as R.N. Elliott originally laid out, when he foretasted the rally to last all the way until the year 2012. The precision he accomplished is remarkable considering he made the call over 70 years ago.

When the bear market intensifies and the debt-money system collapses, central banks will come under fire and get the blamed for it all, when in fact cycles were behind it. In this case, there is a direct cause, the central banking system inflating credit at insane levels, and an indirect cause, the developing Grand Supercycle Peak in optimism, social mood and thus economic progress. Contrary to popular belief, it is actually the indirect cause that is relevant, since it gives the analyst context and a basis with which to predict probable future outcomes. This causality has not yet been accepted by the vast majority of social theorists, and certainly not by the vast majority of equity strategists. It has, however, been discovered and heavily researched by social theorist and market technician Robert Prechter of the Socionomics Institute and Elliott Wave International. As the Grand Supercycle bear market progresses throughout the 21st century, this new science is likely to become more mainstream. For more on this breakthrough fascinating new way of viewing causality, please visit the Socionomics Institute's website by CLICKING HERE.

Monday, July 27, 2015

Long-Term Gold Outlook- A Bold Prediction

When Gold reached a peak of $1923.70 in September 2011, most analysts thought the metal would soar to $4,000+. When sentiment is extreme, and the right technical conditions are in place, markets reverse. Gold is no exception to this principle. Now, with Gold down 44% from its peak, the financial media and pundits have all but lost hope for the metal. This is the type of environment that is conducive to short-term bottoms in markets. But that's not what this post is about.

While Gold is certainly oversold and may rally in the short to intermediate term, longer term, Gold is in a bear market. Most analysts, even the ones that were bullish at the 2011 top, now admit this, even if they call it a "correction in a bull market". What is not a majority opinion by any means, is that Gold has actually been in a bear market since January 21, 1980, when the metal went parabolic and topped at $850 an ounce with the peak in inflation. It subsequently crashed 70% in a long, drawn out bear market that lasted 21 years into 2001. Some say the bear market ended in 1999, however, prices very nearly matched their 1999 low in 2001 in nominal terms, and made new lows in real terms (adjusted for inflation). I have deflated the price of gold using the Producer Price Index, and it bottomed in 2001. What this suggests, is that Gold as a commodity bottomed in 2001.

From the 2001 low, Gold advanced for 10 years into the 2011 top. However, looking back in history, this top was not anywhere near as parabolic as the spike up into 1/21/1980. It is more characteristic of a b-wave advance, than that of an impulse. This Article from an analyst whom I highly respect, although don't entirely agree with, Doug Casey, highlights the fact that the advance this time around in Gold was nowhere near the magnitude that the bull market that peaked in 1980 was. He also points out the fact that measures used to suggest Gold reached its 1980 peak in inflation-adjusted terms are wrong, and instead refers to measures used by John Williams of Shadow Government Statistics, by far the authority on exposing government lies in economic reporting. While Casey uses this as evidence the bull market didn't yet end, I contend it is rather evidence that the entire rally was not a bull market at all, but rather a rally in a much longer-term bear market. Further evidence of the three wave corrective advance comes with the near 1.618 Fibonacci relationship between waves C and A, a common characteristic of three wave corrective moves.

Note: This chart is not drawn to scale. It is tough to say how long the Gold bear market will last. However, a significant low should occur with the next deflationary low.

Short to intermediate term, the counter-trend rally in Gold could coincide with the initial drop in stock prices, as gold is initially perceived as a "safe haven", but then ultimately will not be able to withstand the deflationary pressures, and all assets will fall in value together, just like 2008, except to an even greater degree this time around.

The XAU Gold and Silver Index,an index that tracks Gold and Silver Mining Companies, has collapsed by 80% since its 2010 high. Gold and Silver mining companies will need to consolidate in order to survive, while others will go bankrupt. This will be a positive in the end, as the old makes way for the new, and new companies will emerge when precious metals reach a final low and a new sustainable bull market begins.

Further evidence of the ongoing gold bear market can be found in the Kondratiev cycle. The Kondratiev "Summer", a period of high inflation and slow growth in an economy, ended in the early 1980's, in my view kicked off by the top in Gold, a measure of inflation. The price of gold does not actually fluctuate. Gold can buy roughly the same amount of goods and services that it could many decades ago. What has changed, are values of measuring units, fiat currencies They have been devalued by the inflation of credit all throughout the globe. As the Kondratiev "fall" season progressed, it was the time to be invested in risk assets, and not in commodities, as dis-inflationary forces took hold. What follows the speculative dis-inflationary Kondratiev "Fall", is Kondratiev Winter, a period in which debt and excesses are purged from the system, which began in 2000, and which central banks have been fighting. My contention is, Gold as a measure of inflation, should move below the 2001 low prior to a new bull market beginning. The reasoning for this bold call is that the deflationary low should occur below the dis-inflationary low. Whether this occurs in Gold, remains to be seen. The uncertainty comes with the fact that in the 1930's Gold was used as currency, whereas today, it is not. It was, and still is, the only real money in the system, but the debt accumulation that has occurred over the past 30+ years has been denominated in fiat currencies, not Gold. Therefore, as the debt deflates, it is U.S. Dollars and other fiat currencies that will be in demand, not Gold. This of course completely turns on its head the conventional notion that Gold is a safe haven, and the notion of the "race to the bottom" with currencies we so often hear about. But, market fool people. And, this dynamic is simply another manifestation of this principle. All commodities should be under pressure as the most severe deflation in U.S. History takes hold. The fact that the CRB index of commodities, is nearly back to its 2009 lows, is a sign of trouble around the globe, and it's a hint at what is coming, not an inflationary bout, but a deflationary one.

Of course, nobody knows the future for sure, this is all speculation. I could be wrong in my prediction, but in my estimation, it is a well-founded one that has merit. Time and the market will be the ultimate judge.

Thursday, April 30, 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.  


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.


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.


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.