Elliott Wave Structure Analysis of Markets, and other Macro Opinations

It's 2018, almost 9 years into the current stock market rally that began in March 2009. 2017 saw record low volatility in the U.S. Stock Market, and record levels of complacency and optimism among investors. 2017 marked the first year I did not write about markets since the inception of this blog in November 2009. I felt the need to take a break and let the market do it's thing, as, despite the probabilities assessed in recent years, the great bull market reasserted itself. Incredibly, rather than reversing the uptrend since 2009 and resuming the larger bear market that began in 2000, the market bottomed in 2016, and has accelerated to the upside, amidst a wave of optimism not seen since the 1990's. Taking a step back, however, reveals underlying issues with long-term market structure and has decidedly bearish implications for the long-run performance of the U.S. and Global Stock Markets. Whenever the market does something unexpected, it's wise to zoom out and take a look at the big picture.

As discussed before, in 1974, amidst high inflation and a stagflationary period in the economy, the stock market registered a Cycle Degree low in Elliott Wave terms, and a generational low, and historic buying opportunity, as P/E ratios were in the single digits, and dividend yields were at levels consistent with a secular bear market bottom. The same was true in 1982, coinciding with a disinflationary recession following the peak of inflation and the orthodox peak of the Gold and Silver bull markets. 1982 marked the end of the great secular bear market that had been ongoing since 1966. Following that low in August of 1982, the market took off to the upside in what would become the longest and greatest bull market in history. In 1999, the market peaked in terms of Gold, and in inflation adjusted terms. It appeared to be the end of the great bull market that had at the time, already run much further than expected by traditional Elliott Wave Analysis. That peak in the market was followed by a deflationary secular bear market, which saw unprecedented credit inflation, then deflation as the secular deflationary forces imposed limits to economic growth. The extreme credit inflation following the 2003 orthodox lows in world stock markets was associated with the bear market rally in nominal terms into 2007, which preceded the biggest market collapse since the 1929-1932 Supercycle Bear Market. Despite what appeared  as a certain indication the great bull market was over, the 2009 low only turned out to be wave (C) of a flat correction from 2000. The market has since confirmed an impulse to the upside, indicating a bull market. The only topic up for debate now is, exactly what degree the 2009 low represented. Broader macro considerations will be expanded upon in later posts as data continues to become available,  but for now, one consideration is the continual and persistent slowing of inflation, over time.

Commodities and Deflation

In 1980, coincident with the peak in inflation, the Gold market registered an orthodox top, that in my opinion, has not been exceeded. My thoughts on the matter can be found by Clicking Here. Others may disagree, but I think the case is strong. Nevertheless, I digress. What is not up for debate, is that inflation on the whole, has been slowing since 1980. The robust bull market of the 1980's and 1990's, coincided with disinflation (slowing inflation), and was foreshadowing a period of deflation, just as in the 1920's, preceding the Supercycle bear market and Depression of the 1930's.

Below is a chart of producer prices during the 1920's bull market and proceeding depression. Prices made a lower high in conjunction with the final bull market peak.

Current Chart: 

Here in the current time period, prices declined in conjunction with the deflationary collapse in 2008, but moved to a new high in 2014. The current chart that better illustrates the analogy, though, is the chart of the Reuters/Jefferies CRB Index of Commodities, a global measure of commodities, and in turn, over time, trend in inflation and deflation. As is evident on the chart, prices bottomed in early 2016 in conjunction with the stock market, and have rallied off those lows. Similar to the 1920's, I expect this chart to peak at a lower high in conjunction with the final  Grand Supercycle Bull Market top in stock prices.  Inflation should pick up as unprecedented optimism acts as an impetus for business owners to expand their businesses, and the perceived benefit to tax-cuts and other regulations are cut. The key though, will be a peak of inflation and commodity prices at a lower high, just like 1929. The ultimate outcome circa 2022, should be a resumption of the long-term bear market in commodities, and this time, unlike 2008, an outright deflationary depression. 

I will provide an update to the socionomic implications to politics and economic policy  more  in later posts, but for now, suffice it to say, the appearance of expansionary policies such as tax cuts and regulation reductions, is self-fulfilling as social mood trends more positively, the stock market rises, and business owners expand hiring and consumers increase spending. In the end, the real driving force, and all that matters with respect to markets and economies, is mass psychology and social mood, despite strong and widespread opinions to the contrary.

Given recent market developments, it might be tempting to label the lows of March 2009 the end of a great bear market, and the beginning of a new generational bull market in equities and economic expansion. However, upon closer examination, this argument does not hold up. Below is a chart published by Doug Short over at Advisor Perspectives, plotting the monthly average of daily closes, and creating a regression channel, which illustrate the move above and below the mean regression line during bull and bear markets. As is evident on the chart, previous generational lows, namely, 1932, 1949, and 1982, all experienced moves below the mean regression commensurate with the bull market move that preceded it.2009 however, did not, registering only a 17% move below the mean regression line. Given the 2000 top moved 136% above the regression line, far exceeding any move in history, it would be reasonable to expect an undershoot commensurate with the size of that bull market. Historically speaking the absence of this condition, makes the supposed secular bear market low, questionable at best.

If 2009 was not a generational low, then what did it represent? It would appear, as far fetched as this sounds, that the bull market from at least 1932, and likely from 1974, never ended. That would mean the 2009 lows marked a low of either Primary or Cycle Degree. Below are the top interpretations.


Primary Long-Term Elliott Wave Count:

Elliott Wave Structure thus far for Primary wave 5:

Alternate Supercycle degree Interpretation:

Despite the extremely bearish long-term implications of The Elliott Wave Principle, momentum analysis suggests extreme buying pressure, and thus a long-term peak is not imminently approaching.

High readings on Momentum Indicators can somtimes be interpreted as a sell signal, however, in certain cases, it indicates extreme buying pressure and optimism, and rather than indicating an imminent reversal in the market, can indicate a continuation of the current trend. That being said, the RSI reading at 99%, is extremely high, and in my opinion is a testament to a final burst of optimism. Nevertheless, the analyst should not assume this means a crash will necessarily follow. As is evident on the chart, what is likely to follow is a relief of the overbought readings, and divergences as the market keeps advancing to it's final bull market high. Each bull market is different with respect to the RSI profile, as is also illustrated on this monthly chart above of the Dow Jones Industrial Average. We might therefore expect that while there are likely to be divergences, the setup at the final bull market peak will not look like 2000, or 2007, but unique, entirely dependent on the Elliott Wave sturcutre that the market traces 

Shorter-term,  the market appears to be completing the rally that began in August 2017. Given the relatively low degree of the top, however, only a shallow correction is expected. 

Although 2016 fits well as a fourth wave, there are some indications that it did mark a higher degree low than 2011, which would imply the 2014-2016 correction, in Elliott Wave terms, was correcting the entire move from 2009. While this doesn't appear likely given the shallow nature of the correction at only 12% from absolute high to low (as opposed to orthodox high to low), in order to be objective,  the possibility should be entertained. Below is a chart illustrating this possibility, though the chart is not drawn to scale, and should not be taken as a price projection. Under this interpretation, what is a possibility from a price perspective, however, is that, given the current parabolic nature of the rally, intermediate wave (4) is sharp, sets up severe momentum divergences, and intermediate wave (5) ends up being relatively short-lived, in time and/or price.

Another consideration is the likely occurrence of the 34-year cycle low, a Fibonacci duration cycle, and the last occurrence of which in 1982 marked a very significant long term bottom. This time around, I think the cycle will peak in a highly left-translated fashion, or, put another way, the bull market will peak long before the mid-point of the cycle, leaving many years for the ensuing bear market to unfold.

The market is impulsing to the upside again, that is without question. The question that remains is, how far does the bull market go before the whole Grand Supercycle degree wave of Optimism is finally over? As R.N. Elliott himself stated, time is the least reliable when conducting Elliott Wave Analysis. Nevertheless, given the Fibonacci duration of stock market rallies- case in point, 1921-1929 8 years in duration, 1932-1937 5 years in duration, 1982-1987 5 years, 1987-2000 13 years, 2002-2007 5 years- Since the bull market is now in it's 9th year, this analysis suggests a 13 year bull market, and thus a top in the year 2022. Due to the unprecedented nature of the bull market, and it's extreme extent and duration, it is reasonable to give that time projection some leeway. If the market tops in 2021 or 2023, we can consider that Fibonacci time projection fulfilled. One of the characteristics of bull market tops in equities is momentum divergences. Given that none exist on a long term basis at the moment, it is not likely the market is topping now. Regardless of the exact timing of the ultimate peak of the bull market, the stock market, and no doubt other credit markets, should be running into severe trouble by 2021, with some sectors topping early, as divergences build to set the market up for the final bull market top. The proceeding bear market will be of Grand Supercycle degree, and last for decades.

This is an exciting time for the market, and 2018 will not be a continuous lull in volatility as in 2017. Correction will be sharp and fast, as the market continues to trace out Elliott Waves into the final bull market top. I will provide updates on both a short and intermediate term basis, as conditions warrant or as time permits.