Friday, December 2, 2016

Update on Markets, Other Developments and Observations

With the Presidential Elections now over, many are speculating as to what it will mean for the future of the U.S. and Global Economy. But those who follow the Elliott Wave Principle and its resulting real-time implications know the correct framework with which to interpret these events, and therefore are more likely to be correct at major turning points. It would appear that the current juncture is one such occasion. This is a financial blog, so I refrain from expressing political opinions, but I'll make an exception in this case, as the current political environment is too exciting not to comment on as it relates to social mood and the implicated Elliott Wave position of the stock market. While it is normally logical to assume that the election of Donald Trump will change the course of the United States of America, the Elliott Wave model and the new science of Socionomics teaches us that the election of Donald Trump, rather than being a cause of anything, is actually a result of the wave position of social mood, and therefore indicative of the wave position of the stock market and economy. Once this causal link is established the question still remains, is the election of Trump bullish, or bearish for the future of the U.S. Economy? The answer multi-faceted and complex.

While Pro-Trump voters are elated with the election of their candidate, and the biggest political upset in modern election history, some are also going out on a limb to say that Trump is another Ronald Reagan, and this is just like 1982. At first glance, it might seem tempting to adopt such a viewpoint- both individuals are non-career politicians, and appear to have the best interests of the people at heart, rather than cronies in business and politics, as is the case with many other ordinary politicians. However, it is a mistake to compare the two as if history will repeat, or even rhyme as it often does. The essence of the Elliott Wave Principle tells us that markets and economies repeat history in a fractal form rather than a linear form. This is an important distinction because it prevents the analyst from making the fatal error of assuming, in simplified terms, that the outcome in the next period will necessarily be equal to that of the current period. In forecasting, this method is called the naive model of forecasting- it has that name for a reason. The analyst would be remiss if he assumed outcomes repeat from one instance to the next, and by association, assuming that trends are linear in their nature. Whereas many forecasting techniques in business are not forward looking, and rely on past data to predict future outcomes in a linear fashion, the Elliott Wave model is one of fractal repetition, meaning trends are self-similar at all degrees. The perspective of an Elliott Wave analyst is one of being able to anticipate not only change, but change in trend, at exactly the point at which most observers would be caught off guard. Elliott Wave analysts have a leg up from other disciplines for this reason. I said all that to say this: It is dangerous to assume this is 1982 all over again, first and foremost because this is not 1982, it is the year 2016.

Aside from the fact that outcomes change from one period to the next, in this case 1982 versus the current juncture, 2016, there are many other vast differences between 1982 and 2016. Most people who would agree with this statement would give all the fundamental  economic differences, and many are quite valid, between the two junctures, such as the level of national debt, household debt-to-GDP ratios, labor force participation rate, etc. But I'll spare that discussion in this piece, because the technical evidence that is available stands on its own.

First and foremost, in 1982, the P/E Ratio on the Standard & Poors 500 index on August 1, the month of the final secular bear market bottom in real terms, stood at 7.97, with the dividend yield at 6.23%. This is historically consistent with secular bear market bottom characteristics of undervaluation in equity shares and high dividend yield. As of February 1, 2016, 10 days before the low of the year in many equity indices, the S&P 500 P/E ratio stood at 22.02 and the dividend yield was 2.27%. The valuations at the 2016 bottom are simply not consistent with historical secular bear market bottoms. Therefore one can say, 2016 was not a value low, and thus not the end of a secular bear market. Another major difference between 1982 and 2016 is the fact that in 1982, manic activity in financial markets was nowhere to be found, as investors were highly pessimistic about the future of the stock market and economy. One might argue that the public is pessimistic now, and they are, but only to a degree. That will be addressed next, as there is quite an interesting dichotomy that appears to be unfolding now that also provides evidence. But first, some charts of common, well-known companies and indices:, Inc., An internet retail company, has advanced 2,082% since December 2008, close to the low of the last bear market in equities. This is a parabolic advance and indicative of speculator fervor and optimism, not undervaluation and pessimism. Additionally, a P/E ratio of 169 is extremely high and again indicative of extreme optimism.

Apple, Inc.

Apple, Inc. a computer, cell phone and electronics manufacturer, has advanced 1,104% since January 2009. With a P/E ratio of 13.22, the company is not anywhere near as overvalued as, however Apple's dividend yield of only 2.06% is hardly attractive. Here again, a major company, in this case the biggest company in the world by market capitalization, has run up in a parabolic fashion, something that should not be occurring at the beginning of a new secular bull market. 

The Priceline Group Inc.

The Priceline Group, an Internet Travel Company, has advance a mind-blowing 3,446% since October 2008. It's P/E Ratio is currently sitting at a lofty 37.60. Here again, this is a company that has been bid up by investors to extreme levels, further indicative of manic levels of optimism in the financial markets.

Amex Biotechnology Index

These stock manias are not isolated examples, either. The Amex Biotechnology Index has advanced 778% since November 2008, again illustrating the manic behavior of stock prices.

If these examples aren't convincing enough, look no further than the Dow Jones Industrial Average itself, which, at the February 2016 low, was 31.9% above the level of the start of the secular bear market in January 2000. Compare that with the 1982 low, which was 23.6% below the level of the start of the secular bear market in February 1966. Additionally, the nominal stock averages registered new all-time highs in 2013, a full three years before the supposed end of the secular bear market here in 2016, amidst a rally that is even more parabolic than the rally in the late 1990's. This again further serves to confirm the terminal nature of the rally in equities.

Given the weight of the evidence, from individual stocks and indices staging parabolic advances since 2009, the lack of a value low in 2009, as well as the continued move to new all-time highs all throughout the supposed end of a secular bear market, which would be labeled at least one degree higher than the secular bear market of 1966-1982, the stock market is acting much more like the end of a secular bull market, than the beginning of one.

The Bond Market

Bond prices appear to have finally peaked, yet another beneficiary of the great bull market. The 35-year rally in government bonds, and decline in yields, has been coincident with the rise of most other assets since 1982, when Primary wave 3 of Cycle wave V in the stock market commenced, and the financial mania that is incredibly still ongoing to this day began. While many believe bonds move opposite to stocks, on a long-term basis that isn't true, and they have for the most part, both been in an uptrend since the early 1980's. The peak in the bond market is being interpreted by some to mean money will begin flowing out of bonds for many years, and into equities, and that this is therefore bullish for the stock market. That thinking is much more likely to be representative of investors justifying their optimism at a major peak, then an actual likely scenario for the future. The rise in bond yields likely represents both a burst of optimism near a peak with a widespread belief that business activity will pick up along with a demand for loans, which would then justify a rise in the price of money, interest rates, as well as the stealth beginning of a bear market in debt instruments; namely, most corporate and municipal debt as the economic depression intensifies, and entities both public and private are forced to declare bankruptcy and default on debt obligations, rendering many bonds worthless or nearly so. While the U.S government itself may not declare bankruptcy, the rise in long-term interest rates is more likely to be indicating investor fear of default, and a move out of bonds, than a sustained trend of economic optimism. The decline in bonds, as well as a myriad of other markets that have been expressions of long-held optimism, is likely to go from orderly, to disorderly as pessimism begins to dominate diverse financial markets all over the world. The Federal Reserve is also likely to be forced to raise raise their own target rates during a financial collapse, as the bond market demands ever higher rates of return, just as during the 1929-1932 collapse. Built up excesses over the past few decades are about to come unwound, and it will result in a total collapse of financial assets around the world. Nevertheless, topping is a process, and in the meanwhile, while the last of the financial markets top out, the current mix of optimism and pessimism as reflected in the rise of bond yields, is likely to remain until the U.S. stock market registers a final high. Additionally, this market psychology hybrid dynamic that appears to be occurring in the bond market, is not limited to the bond market by any means. It is indicative of the end of the giant Grand Supercycle topping process that began in 2000, and a transition from bull market psychology, to bear market psychology.

The Current Optimism/Pessimism Duality 

One may come to the logical conclusion that this has been a secular bear market given all the turmoil around the world and in the U.S. since 2000, but given the weight of the technical evidence, question that thesis. The answer is, it would appear, while the rest of the developed world has been in a clear secular bear market, with many European equity indices nowhere near all-time highs, save for Germany, the U.S. has been the last holdout, and is the last one to top. This stands to reason, given that globalization and the resulting effect on world economies has been mainly a function of the agenda of the U.S. Government and Corporations. Put another way, the driving force behind the economic expansion of the great secular bull market in western civilization, globalization, is centered right here in the United States, so it stands to reason that the U.S. economy would be the final holdout in the giant expansion that is Cycle Wave V of the supercycle bull market.

The election of Donald Trump, at least in so far as the electorate believes, represents a repudiation of that policy. Whether or not he actually carries out that agenda is irrelevant to this analysis, because what is being examined here is the election of Donald Trump as it relates to, and indicates, the wave position of the United States. Trump appears to be both an expression of optimism, as well as pessimism. A populist president has not been elected in many, many decades, and it's clear there are big changes afoot in U.S. politics. People are tired of establishment politics and corruption, and the election of Donald Trump brings this phenomenon clearly to light. On the one hand, arguably the biggest political shakeup in U.S. history indisputably represents negative social mood and upheaval, common characteristics of a secular bear market. Also of note, is the fact that all throughout the supercycle bull market that began in 1932, an establishment politician has been president. Now, that mentality has been repudiated by the american public. This is something that has not occurred during the entire bull market. The shift in mood that has brought on this change in politics, may also be indicating the end of the supercycle bull market that accompanied establishment politics. As market market technicians, we look for changes in character to indicate a change in trend before most other analysts recognize it as such. This change in U.S. politics certainly qualifies. From a social mood perspective, while it may appear at first glance that the election of Trump is representative of upheavel and bear market mood, on the other hand, the election of Donald Trump amidst his promises to "Make America Great Again", and the sudden burst of optimism about the future of the country this has appeared to invoke, could well be interpreted as a contrary indicator, and indicative of a top in equity markets, rather than the beginning of a new secular bull market. Put another way, this type of new-found hope was not present in 2009, at a significant stock market bottom, but now that the market has rallied for 7 years, people are finally optimistic that good times are coming back. Given the imperative that the public is always wrong, and can therefore be used as a contrary indicator, it would appear the current euphoria and new-found hope, especially given the weight of the technical evidence in the stock market, is more indicative of a terminal move, than of the beginning of a new bull market. This combined with the underlying rot of the debt-money system, extreme overvaluation in financial markets, and the pessimism and upheaval that is clearly taking place on the streets, with some chanting Donald Trump is "Not My President", suggests a major shift is coming. Further conflicting evidence can be found in arena of scandals. Wells Fargo is in the spotlight as it is being revealed that employees of the bank, in an ill-fated attempt to meet their quotas, created fake accounts in customer's names, with those same customers being charged bogus fees for an account they didn't open. This type of fraud happens all the time, but it's during periods of negatively trending social mood when they are exposed, as people focus on the negatives more than the positives, just as there are more sellers than buyers in the stock market. The Wells Fargo Scandal is clearly indicative of negative social mood, but in another instance of social mood sensitive outcomes, people have spent a great deal of time focusing their attention on Hillary Clinton and the Clinton Foundation as criminal entities. But, amidst all this supposed pessimism, she wasn't even prosecuted. More recently, with the market trading at all-time highs, the now President-Elect Donald Trump said he wouldn't even carry out his campaign promise of hiring a special prosecutor to investigate and possibly jail Hillary. If mood were decidedly bearish, Hillary would likely be well on her way to jail already, and yet with all the time and energy the public has spent on her, she appears, for now, to be off the hook. When social mood turns down for good, there is a very real possibility Hillary will be investigated once again, and prosecuted. It is social mood and perception that is driving all of these social and political trends, not objective analysis and reality itself.

While it is tempting to draw parallels between Trump and Reagan, and declare a new era is upon us, the data cannot be ignored, and the very real possibility of a financial crash and economic depression must not be taken lightly. This being said, because Social Mood has been declining for well over 16 years now, since the first quarter of 2000 when the Dow priced in ounces of Gold topped, and the whole global secular bear market began, it would not be surprising to see a divergence at the ultimate low of the supercycle bear market between social mood and stock prices. It is quite possible that the social upheaval that lead to the election of Donald Trump is setting up for an upcoming low in social mood. While the financial markets are imploding, and the economy is tanking, it would be with the understanding of the american people that what is collapsing is the old way of doing things, and it would be a welcome change, again indicative of the repudiation of Keynesian economics, crony capitalism, and establishment politics. This divergence where social mood would begin a basing pattern, while stock prices and the economy collapse, would serve to balance out the divergence that has occurred on the other side, where nominal stock prices have remained elevated, yet social mood has clearly deteriorated for many years now. Also supporting this scenario is the notion that the coming Supercycle collapse in stock prices is only supercycle wave (a) of a larger, Grand Supercycle bear market, so there may not be a basing process with stock prices, as there was after the 1929-1932 Supercycle collapse, and the 1966-1974 Cycle degree bear market. From a secular perspective, then, we can say that while stock prices are approaching a major price peak, this leg of the secular bear market that began in 2000 is getting very mature in terms of time, and a low might therefore be approaching, both in the economy and the stock market, sometime in the early 2020's. If that turns out to be correct, then needless to say our new President would be in for quite a wild ride in popularity. Perhaps another pertinent observation is that as the country approaches a Grand Supercycle peak, it is fitting that Trump, who is the epitome of everything the United States has represented- wealth,  hard work perseverance, discipline domination, and victory- is president at the very peak of it all. The question is, will he also be the justification for a turnaround in both social mood and financial market stability at the final low. People blame or credit the sitting president with whatever happens in the macro picture, so Trump's legacy will depend on whether the market tops and collapses in 2017, or after some years of stronger economic growth. If the market decides to extend even further beyond 2017, Trump would likely be re-elected and the crash would come in his second term, rather than his first. While people will credit or blame Trump for the economic outcome, Socionomists and Elliott Wave Analysts  know better, and we will be analyzing the market, social mood and social action in real-time, without political bias.

Stock Market Elliott Wave Picture

One possible scenario for the end to the bull market, is an ending diagonal, which should ideally finish sometime in 2017 to mark an 8-year bull market, the same number of years that attended the 1929 Supercycle top. Short-term, the market is extended and likely to correct in wave b of 3. If this count is correct, the market will continue to push higher to complete the ending diagonal, with waning momentum, into the final high in 2017, at which point the market will crash, to kick off the Grand Supercycle bear market in nominal asset prices, just as it did in 1929. Except, this time the market is about to register an even larger degree top, so I would not be surprised to see a swifter collapse. Either way, it will be quite a sight to see.

If I am wrong in my analysis of this election cycle and the resulting implications for the stock market and economy, so be it. But what may appear to be one thing on the surface, may actually be another entirely when properly analyzed. The evidence is undoubtedly mixed, but based on the data at hand, this is much more likely to be a final rally of the great bull market, than the beginning of a new secular bull market. Either way, there are big changes coming, and volatility is about to pick up in a big way, financially socially and politically. It's important to position portfolios and assets now accordingly. 

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.