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.



3 comments:

  1. Thank you. This is really good

    ReplyDelete
  2. Perhaps you could comment on the applicability of EW Theory when social mood is no longer the primary driving force of the market. Clearly, its driven by FED liquidity, HFT, and manipulation by the ESF, PPT, and their minions.

    ReplyDelete