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.