Market Update: March 2009 in Reverse

Back in March 2009, when markets worldwide were bottoming after the most severe bear market since the 1930's, we had some of the lowest sentiment readings on record. The DSI, daily sentiment index, which polls futures traders, printed a reading of only 2% bulls. Fear was dominant, and articles calling for Dow 5,000 were not hard to come by. Now, let's fast forward almost five years, to January 2014. The U.S. stock market is registering new all-time highs, and it feels like 1999 all over again. The question is some technicians minds is: Is this a new bull market, or just a continuation of the old one? From my standpoint, the answer is, neither. Although virtually nobody believes this anymore, I am still calling this a bear market rally. Many people are probably scratching their heads wondering how one can be calling an almost 60 month advance that brought the market to a new all-time high a bear market rally. The answer lies in a number important factors, but perhaps the most important distinction is the failure of the market to reach new highs in terms of purchasing power. Back in 1999, if one examined the Dow Jones Industrial Average, the most well known measure of stock prices, it was making new all-time highs in terms of just about every commodity. Now, however, these measures are failing to do so, even with commodities in a bear market.

Dow purchasing power in terms of Real Money (Gold):

                                 Dow purchasing power in terms of Oil:

 

Dow purchasing power in terms of Copper:

As is clearly evident from the charts above of the Dow Jones Industrial Average priced in various industrial commodities, the actual purchasing power of the stock market has been in a persistent downtrend since 1999. The only measure that has held up since 1999/2000 is the nominal Dow. Further, the only reason it has held up has been massive inflation, which has decimated the value of the U.S. Dollar, through a massive credit inflation scheme that has been going on since the inception of the Federal Reserve in 1913. However, it is my sincere belief that even in nominal terms, the stock market will experience a dramatic collapse, as the value of dollar-denominated credits, worldwide, trend lower. Please find below an updated chart of the Dow Jones Industrial Average in nominal terms. 

Although the upper trendline of the monthly broadening top on an arithmetic scale has been broken, the market is respecting the upper trendline on a logarithmic scale.Because logarithmic scale represents relative percentage movements, rather than on an absolute basis, longer term moves are best illustrated in this form.

Now examine the same chart close up to today's prices:

                                         Big Picture Elliott Wave Count:   

                         

                               

                                   
                                        Cycle wave b internal wave structure:

                         
  If my long-term analysis is correct, cycle wave c down is next, and it's going to be accompanied by severe deflation across the board. It will truly be one for the record books.