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:


Amazon.com, Inc.



Amazon.com, 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 Amazon.com, 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. 

2 comments:

  1. You were correct when you still had this as a monster B wave at cycle degree.

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