Wednesday, July 2, 2014

A Long-Term Elliott Wave Analysis

There is much debate in the Elliott Wave Community over the long-term count. Did the Bull Market end in 2000? Did it end in 2007? Or, did it never end, and is still in force? Remaining objective, let's take an in-depth look at three possibilities:

Preferred Count: Bull Market topped in 2000

Logic and Reasoning: As I have illustrated before, the stock market, using the Dow Jones Industrial Average as the best long-term proxy of market progress, priced in almost everything except U.S. Dollars, topped in 2000 and stopped exhibiting any impulsive price structures at that point. All rallies since then, priced in terms of most assets, have been reflective and indicative of a counter-trend, bear market rally in stocks. In addition, the advance from 1974-2000 resembles quite closely the advance from 1921-1929, the last Cycle wave V high. The rally that began in 2009 is the most extended 4-year cycle advance in stock market history, now in month 64. If there is doubt over this count due to the duration and extent of the rally, one should keep in mind that under this particular count, the 2002-2007 rally is also a bear market rally, labeled Primary wave B (circle). It ran 60 months, matching the longest 4-year cycle advance of 60 months from 1982-1987. Therefore, if one is going to call that advance a bear market rally, which seems to be the case given the evidence stated above and in previous posts, then one should not have an issue with labeling another stretched 4-year cycle, a now 64 month advance, a bear market rally as well. This count has an expanded flat pattern from January 2000-March 2009 for cycle wave a, and the rally since March 2009, cycle wave b is serving to correct this decline, in a larger expanded flat pattern.  Given this count, it would not be unreasonable to expect a new high in inflation-adjusted measures of the market, since new highs in the b-wave are often characteristic of expanded flat patterns. Another supportive feature of this count would be the fact that the rally has occured not only on low volume, but decreasing volume the entire time. This is best illustrated on a yearly chart, below:

As is clearly evident from the chart, volume was increasing into the 2000 top, which is indicative of a true bull market. Volume tends to increase with each price bar in the direction of the prevailing trend, and decrease with each price bar counter-trend. As price declined into the 2002 low, volume increased year-over-year from 2000-2002. Then as the rally out of the 2002 low began, volume once again dropped off in 2003 and 2004. It picked up in 2005, but that was a slight down year for the Dow Jones Industrial Average. 2006 was the exception, as volume picked up on the rally. 2007 saw decreased volume on an up year, and volume spiked dramatically on the decline in 2008. Since the 2009 low, every year has been an up-year, and every year saw decreased volume from the prior year. This is NOT characteristic of a true bull market, but rather of a liquidity-driven bear market rally.

Further evidence that the bull market ended in 2000 is found in the true measure of market valuation, the Dow Jones Industrial Average priced in terms of Gold. If in fact the bull market ended in 2000, then the rally that began in March 2009 is of a higher degree, cycle degree than the rally from 2002-2007, primary degree. Commensurately, the market has rallied further in percentage terms, and for a longer period of time, than it did during Primary Wave B. Also to be expected, while the Dow priced in gold was actually falling during the 2002-2007 rally in nominal terms, this time, the ratio bottomed in association with the 2011 low, and has been rallying along with nominal stock prices since that low. As a result, the Dow priced in Gold has exhibited a larger rally during Cycle Wave b than it did during Primary Wave B. This is also indicative that the current rally is of a higher degree than the 2002-2007 rally.

On October 9, 2002, the day of the closing low in the Dow Jones Industrial Average, the Dow was trading for 23.74 ounces of gold. On October 9, 2007, the day of the closing high in the Dow Jones Industrial Average, the Dow was trading for 19.06 ounces of Gold. So, during the longest 4-year cycle advance in history at the time, in which the nominal Dow gained 94%, the real value of stocks actually lost -19.71%. This is certainly indicative of a bear market rally, and is further evidence supporting the fact that the 2002-2007 rally was NOT a bull market, but only a rally within the context of the larger bear market that began in 2000.

This time, the Dow priced in ounces of gold bottomed on August 10, 2011 at 5.96 ounces of gold, and reached a high of 13.76 ounces of gold on December 31, 2013. This represents a gain of 130.87% and is far stronger than the 2002-2007 rally in real terms on a relative basis. This again suggests that the March 2009 rally is of a higher degree than the 2002-2007 rally. 

Please also consider charts below of the Dow Jones Industrial Average adjusted for the M1, M2, and MZM money supply measures, respectively. All of these measures of market valuation rallied strongly in the 1990's, very similiar to the nominal averages. However, unlike the nominal averages, these measures adjusted for money supply topped in 2000, and are significantly below their all-time highs and further suggest both the 2002-2007, as well as the rally that began in 2009, have been bear market rallies in an ongoing secular bear market.


 Alternate Count: Bull Market topped in 2007

Logic and Reasoning: One possible argument for the Bull Market having topped in 2007 is that the 2005-2008 period was the peak in public speculation, from real estate, to stocks, and then to commodities. Both real estate and commodities remain below their respective all-time highs. What followed the 2007 top was the largest market decline and financial crisis since the great depression, including significant contractions in the supply of money and credit. One could argue that the bull market topped in 2007, then, on the basis of the peak in public speculation, which clearly has not returned to it's prior levels of 2005-2008. On a technical note, should this count be correct, the resulting wave c down should be very swift, as a common trait of c waves in expanded flat pattern is that wave C is steeper than wave A. Given the swift nature of the decline from October 2007-March 2009, this is a particularly ominous count would portend an all-out collapse in investment prices across the board in a great panic that could very relatively short lived in time, but very destructive in price.

Second Alternate Count: Bull Market never ended, still ongoing

Logic and Reasoning: Many measures of investor sentiment have exceeded their prior all-time highs, tech IPO's are booming again, and the Stock market is trading at all time highs.

Issues with this count: The reason I have designated this count as second alternate, is due to the fact that the bear market and recession of 2007-2009 was the largest since the 1930's depression. That means it was larger than the entire cycle wave IV bear market between 1966-1974. To say that this is still part of an ongoing bull market, from the 1974 low, would be, in my estimation, omitting this data and it's logical followed conclusions. While I would favor this count over one that suggested the bear market ended in 2009, and this was a new bull market, it still has many logical and statistical issues with it, not the least of which include the fact that this rally has occurred on extremely weak technicals, as illustrated above, as well as the state of the general economy. Many pundits termed this the most jobless recovery ever. Well, I contend that the relatively weak job market throughout the entire rally, and more recently, GDP, which just contracted at an annual rate of -2.9% in the first quarter of 2014, as opposed to the consensus of -1.8% by economists, is hinting that this is not a recovery at all, but rather a reflationary period in an ongoing depression. Even economists, which have been calling this a "recovery" expected negative growth in the first quarter. These readings are not bull market material. I have said all along that this is NOT a recovery, but early in an ongoing depression that began in 2000.

Whichever of these three counts turns out to be correct, all the evidence points to the conclusion that once this rally terminates, the outcome will be nothing short of a financial disaster that takes the market below the lows of March 2009.

When all the evidence is concatenated, the most logical conclusion in my view is that the greatest bull market in history topped in 2000, and this rally since 2009 has been a massive, liquidity induced bear market rally, and the second since the bear market began in 2000, the first being 2002-2007. However, it is quite clear that the topping process is still ongoing, with investor optimism at extremely high levels, while the underlying economy is slowly slipping into depression. Although the bull market in stock valuations ended in 2000, and thus the bull market in stocks themselves, what didn't end, was the bull market in credit. It has been the reflation of the credit money supply that has allowed the nominal stock averages to register new all-time highs. And, just as the tech bubble, housing bubble, and commodity bubbles all ended in a collapse, so to will the credit bubble itself. Except this bubble represents the nature of the credit money system itself, that has simply been the medium through which we have seen an unprecedented number of consecutive bubbles in different asset classes in the past 30 years. I believe the evidence also points to the fact that when the reflation ends this time, it will not be simply one or two asset classes that collapse, but the entire debt-money system. Decades of credit expansion will reverse into credit contraction as people become more cautions and social mood really starts turning negative. We will see this manifest itself in lower prices for assets across the board, even in nominal terms, a severe contraction in economic activity, as well as social unrest. It's a Grand Supercycle Bear Market, and the ultimate downside resolution is going to be breathtaking.


  1. One issue with this count is how high can a b wave go before you say it is not a b wave? Expanded flat I thought max b to a ratio was 1.382 and we are well beyond that. Not saying I disagree with you but makes me doubt

  2. An expanded flat "usually" has wave B between 100% and 138%, but it is not a requirement. You can see a good, real-life example on page 47 of Prechter's book that goes well beyond 138%. Currently we are at almost 150%. The strongest arguments for me for validating the above analysis are social mood and fundamentals, both of which seem very "corrective" as this author posits. Nice blog post!

  3. Great analysis! The structure of this rally also argues that this is a wave B. A confirmation would be moving below the 2011 highs (Top of wave W) which would eliminate the chance it is a wave 1.