Long Term Projection, Macro, and an Analysis Retrospective

Since late 2010 I have put together a lot of work that I have shared with the community that I think has been of high quality. It has remained objective and has run counter to mainstream macro, fundamental and technical analysis at the correct times (I was calling a significant top and going short in May 2011 when most of the participants in these communities were looking for moves higher and I was calling a significant bottom and going long in Oct 2011 when most of the participants in these communities were looking for moves lower, and I was calling for new recovery highs in early 2012 when most of communities were looking for lower highs). My analysis has been very timely and actionable, and in January 2011 I started posting the signals from my Trend Systems publicly.

I wanted to review/update my long term projection as I tend to do every few months. But more that that, I wanted to take the opportunity to discuss my previous studies that were very in-depth and has been calling (at lest thus far) the larger trends correctly from fundamental, macro and technical standpoints.

Macroeconomic Developments

My Macro Page has a number of good notable posts that are worth reading. But I would like to highlight three posts in particular related to market developments:

In July 2011 I wrote this post dispelling the myths that Quantitative Easing was 'money printing' and showing what some of the drivers of the rally really were. And it was an extremely timely post warning about a market panic in the near term based on decreasing margin being used, but being very clear at the end of the post that the market was not on the verge of a 'collapse' and that the cyclical bull was not over.

In August 2011, in the middle of the panic, I wrote this post which discussed the reasons why the wave developing down was not the precursor to a bear market with an associated recession. The deficit spending position of the US Government was (and still is) at a high enough level to support aggregate demand and well as allowing the private sector to pay down its debts (it is making progress but the private domestic sector as a whole is still in a balance sheet recession). I was stating that calls for a recession were misguided (keeping in mind this is when the ECRI recession call was gaining substantial popularity).

In January 2012 I wrote this post which discussed both near term and longer term macro realities and risks. I thought that the calls for a recession in the near term were still incorrect and those looking for a 'major top' based on near-term recessionary risks were misguided in January (and still misguided today). However, things are not 'fine' with the US economy and I believe that we are still in a secular bear market because of the associated economic and demographic issues at work (and I think most macro commentary on these matters is incorrect). I simply believe that this secular bear is progressing more slowly (but still in-family with previous secular bear timelines) than most analysts think.

Fundamentals and the Current Cyclical Bull Market

I have been maintaining since Nov 2010 that we are still in a cyclical bull market. And even further, that we are still in the middle of this cyclical bull. And that attempts by those to keep calling 'the' top of it would be met with money-wasting frustration.

I have written many posts regarding the fundamental drivers behind this rally (Corporate profit margins, corporate earnings, etc.) and that none of these items are close to suggesting we are at the end of this cyclical bull:

-- Corporate Profit Margins, the Stock Market and Recessions, Mar 2012
-- Long Term Technicals and Macro, Jan 2012
-- Yet another reason why I don't think we saw 'the' top (3), Nov 2011
-- Yet another reason why I don't think we saw 'the' top, Sept 2011
-- Yet another reason why I don't think this cyclical bull is over, Aug 2011

These are all good reads and I highly suggest taking a look

In-Depth (and Unorthodox) Technical Studies

My 'Moving Average Price-Stretching' study came about by looking at the structure of this secular bear market (since 2000) and thinking about its characteristics and what other periods it was similar to. The original post (Jan 2011: Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching') describes the genesis for this study. I provided an update in Nov 2011: Moving Average 'Price Stretching' Update. I will also include an update here, so far it is still right on track:


The next study that I would like to highlight was my BPSPX study (BPSPX = Bullish Percentage of SPX stocks, a market-based pseudo-sentiment technical indicator). Contrary to the analyst community which largely saw the spike in the BPSPX (to an all-time high) in May 2011 as well as a huge spike in bullish sentiment on a number of surveys as signs of 'the top', my studies have shown that bullish sentiment extremes tend to happen in the *middle* of moves, not at the end of them. There is bullish sentiment spikes at the end too, but they are less pronounced then the move in the middle. The original study is from Feb 2011: The BPSPX and the Secular Bear Count and I did an update in Nov 2011: BPSPX Update. Here is the updated chart:


Next up is my VIX/CPCE chart. My original study from Nov 2011: Yet another reason why I don't think we saw 'the' top (3) made the observation that there was no VIX divergence at the May 2011 peak. And this was another reason (among so many others listed above) that the May peak did not market a 'major top'. That call has since been confirmed with the new recovery highs. Here is an update to the study:



Notable major real-time calls that ran counter to what the larger technical/EW analyst community was saying

There were three calls in particular that I believe has distinguished my track record as a technical analyst because they were timely, actionable and ran counter to what the larger community was saying (rather loudly). This combined with other characteristics (On Mea Culpas, Admitting to Being Wrong, Objectivity, and Changing Stances in the Face of New Evidence) should reinforce the strength of my objectivity in readers minds.

1) The 'Top' Call of May 2011. - I think this particular call distinguishes me in two ways: i) That I was making a call for a significant correction where the rest of the community was looking for a higher high, and ii) the fact that I specifically was not calling *the* top, that this was a 'top' / mid-range correction in a cyclical bull market that was not complete. I made two posts in near real time (within a couple of days of the top) calling this top: (May 2 and May 5 (and a Long Term View Update)). And I performed an in-depth review of this call (both my actions and the actions of the larger EW community) here: Regarding Tops and Sloppy / Misleading EW Practices

2) The bottom Call of Oct 2011 - Another contrarian call where many analysts were still warning of lower lows being imminent. I made a real time call on Oct 5 and I performed an in-depth confirmation a few days later: Revisiting the Large Count.

3) The Call for new Recovery Highs - After the Oct low was established, the EW community was counting the move as a wave 1 impulse down and was contending that were in a wave 2 retrace back up. I had vehemently rejected that count since August 10 showing why it was completely incorrect to count the move as an impulse down. And after the 'five-wave structure' had developed after the Oct low was established, I was the minority voice (if not the lone voice) discussing why that impulse count was still invalid (chart from November, note the observation at the top regarding the Nasdaq). But while many were expecting the move to stop going up because they were mistakenly calling it a Wave 2 (because of the mistaken/biased call that the preceding move down was a Wave 1 impulse), I was looking for new recovery highs: EW Shenanigans.

Long Term Projection History and the Current Projection

I have a long track record of being consistent with my projection. It has obviously adjusted based on how events actually unfolded (absolutely *nobody* can predict the future), but this long term projection which serves as my preferred count has been quite good in general directionality and intermediate timing.

-- Nov 2010: Abandoned the Primary 2 count and adapted my leading alternate count which was a Cycle X count - The Large Count

-- Jan 2011: Rethought the size of Cycle X with some historical analysis and comparisons. I lay out my thoughts for March 2009 - June 2011 (projection at the time) being only Primary W of Cycle X - The Large Count with Historical Perspective

-- Jan 2011: Macro thoughts that accompany my projection - Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?

-- Feb 2011: Long term context - Secular Bear Market Projection in Historical Context

-- Mar 2011: An in depth study and a comprehensive list of references and analysis of previous work. I highly recommend reading this post and following the references - First Derivative of the S&P 500, Long Term Study

-- May 2011: Count of the large structure (the top of this wave) being completed in real time - May 5 (and a Long Term View Update)

-- Aug 2011: Macro thoughts in the middle of the August crash putting this wave in context (specifically refuting that this was the start of 'P3') - Update on Long Term Projection

-- Oct 2011: Real time count that pointed to the October low as being a significant low based on how the waves and indicators unfolded - Revisiting the Large Count

-- Jan 2012: Confirmation of the October low being a significant bottom - Update on Long Term Projection

Primary Wave Projection



Secular Bear Market Projection / Long Term Count



4-year Cycle Chart

This chart comes from this study (A Look at 4-year Cycles) and fits pretty nicely with my long term projection.

A Look at 4-year Cycles

As I have stated many times, my Trend System does not issue signals on a strict time relationship. (See this post for more details: Dec 8 - Daily Cycles, Looking for an Edge).

But I know that most people want to and do count cycles on a strict time relationship (e.g. a seasonal cycle / 1 year, 4-year cycle, K-waves / 40-year cycles, etc.). So I wanted to take a stab at a 4-year cycle chart.

The first observation that is immediately obvious if you look at the SPX (and S&P Composite) back to the Great Depression is that the market generally trends up, and as such most 4-year cycle tops are not 'major tops'. But often are just a mid cycle climax followed by a pullback, and then a continuation (higher high) up. And what's more is that trend is observed in recent market history as well.

The way I constructed the chart below was to assume that the 2000 and 2007 peaks were major tops (and hence 4 year cycle tops) and did a best fit of 4-years cycles around those peaks. Obviously the 4-year cycle will not be *strictly* 4 years long (e.g. the time between the 2000-2007 peaks is about 7.5 years, not 8 years, which means that each '4-year' cycle is more like 3.75 years ... but almost counts in horseshoes, hand grenades, and cycles work :) ).


What I have done is place my theoretical Secular Bear Market Projection in Historical Context on the chart. And what is interesting is that the 4 year cycle boundaries line up nicely in terms of how long I think the major waves should approximately last in my projection.

Take this projection from this post: Update on Long Term Projection


This observation also fits very nicely with my Bear Market updated Price Stretching chart which is described in these posts:

-- Moving Average 'Price Stretching' Update
-- Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'


Another reason why I find this projection compelling is that it give all the internal indicators (which have been making highs right alongside price this entire rally) time to roll over and go into divergence, as discussed here: Long Term Technicals and Macro

For crying out loud nothing about this chart is bearish for the 2011 top, whereas *everything* was bearish for the 2007 top. Again, no evidence for a top call based on a look at multiple sets of market internals.

Long Term Thoughts on the RUT

Okay, it's time for Crazy Uncle binve's Unpopular Opinion and EW Count Time!

Today's installment will be regarding the Russell 2000.

First, let me say that this has been a point of particular focus of Blankfiend, such as this post and several others. I really appreciate his efforts because the RUT does not display the same characteristics as the other indices.

Second, let me say that I am expecting little to no agreement with this post. In fact, I am expecting to get a lot of disagreement / 'what are you smoking' type comments like those that I got with this post.

Third, I think most of the standard macroeconomic analysis that accompanies long term projections is partially if not completely flawed. I think only a tiny minority of analysts actually understand monetary systems. I think only a tiny minority understand that the US and the EMU operate under fundamentally different monetary systems. I think only a tiny minority understand what a sovereign debt crisis really is and the fact the the US has no sovereign debt crisis whatsoever (except for a self-imposed 'debt' ceiling constraint). There are no US Government Bond Market 'Vigilantes'. The US is not on the doorstep of a hyperinflationary depression.

I think I see things a bit differently than most TA and EWP analysts out there.

I view long term trends through the lens of macroeconomic policy decisions. And currently, while the US is cutting back spending, it is not embracing full-blown austerity. This means that current deficits of ~9% of GDP are supporting aggregate demand in the economy, and stocks can still generate reasonable profits and profit growth in this environment. Not stellar, but enough to limp along. Remember, the stock market is not the economy.

But there are major long term risks. NOT US sovereign debt (which is not a bubble, despite those trying to call the top in it). But the size of the financial sector and the continued financialization of the US economy. I think the financial sector, and the instability it promotes, is the biggest impediment to long term growth. And we saw from the 2008 crisis that the financial system was not reformed (even though we had our chance). TBTF was allowed to become TBiggerTF. See section 5 of this post.

My point is that the US can continue to limp along so long as austerity is not embraced (Of course, like I said here and here, if the US significantly embraces austerity, then all bets are off and look out below.). But that the instability that the Financial Sector creates will precipitate another cyclical bear market.

That in a nutshell is my macro stance:

1. We are in a secular bear market, because the cancer (size of the Financial sector) was never removed from the economy
2. The instability that the Financial Sector creates will precipitate another cyclical bear market
3. The next cyclical bear market will cause enough animosity that there will be political will to finally reform the financial sector
4. At the end of the next cyclical bear will be the end of the secular bear market (that started in 2000), and the next secular bull will begin
5. As long as the US does not fully embrace austerity, then a Great Depression-type scenario can be avoided. If it does embrace austerity, then all bets are off and look out below (and God help the US economy and population).

My long term thoughts that go along with these macroeconomic conditions are described in a few posts:

-- Update on Long Term Projection
-- Secular Bear Market Projection in Historical Context
-- Lessons (To Be) Learned... again.
-- Real Secular Bear Markets

Also, there is a lot of good background reading in this post: First Derivative of the S&P 500, Long Term Study and My macro tab.

So how the the RUT fit into all of this?

I think calling the RUT a major broad market index is misleading. I think the RUT is to the SPX as what JNK is to LQD (roughly speaking, I am *not* suggesting that all RUT stocks are 'junk' stocks). They each measure different things. But I think the SPX is a closer representation of the the expectations of what is happening in corporate America and the US economy than the RUT is. I think the RUT is a measure of smaller and much more speculative issues.

As such the RUTs gains and losses are much more exaggerated. And as the financialization of the economy continues and leveraged money continues to look for gains, it will find its way into riskier assets. And yes, I think the RUT is a much riskier asset class than the SPX. And so I think that this 'overshoot' phenomena to the upside on the cyclical bulls (and much higher than then end of the last secular bull) can be explained by this observation.

With that, here are my thoughts on the monthly chart of RUT:


I am calling the end of the secular bull in the RUT a bit earlier (1998) than then end of the secular bull in the SPX (2000). And what we can see is that the 'middle wave overshoot' phenomena occurs relatively early on in this large corrective period.

I think one of the keys to recognizing this is the fact that the move from 2002-2007 is clearly not an impulse. However you want to subdivide it, it looks and counts like a corrective wave up that goes to clearly new highs. Yet it is not an impulse (and hence cannot be the start of the new secular bull market).

The upshot is that I think the RUT, like the SPX, is in the middle of its secular bear market. And if I am correctly identifying the end of the previous secular bull (500 in 1998) then the next cyclical bear (and likely the end of the secular bear as well, subject to the macro caveats above) will make one more move below this level.

Update on Long Term Projection

Preface:

This might seem like an odd time to update my long term thoughts. We are in the middle of a panic (maybe even a crash), things are in turmoil. Both Republicans and Democrats made an absolute spectacle out of this idiotic debt ceiling debate, there is major nervousness about the EMU debt issues, there are concerns over economic slowing (GDP growth was low and revised down), etc. Some legitimate topics for concern.

But really, the market just needed to correct from the previous rally, that was driven mostly by margin (and some fundamentals, earnings were good the last couple of quarters) based on the rampant misconceptions of QE2: See Margin Debt, the Stock Market, and QE and Easily the best summary post of the effects of QE2 that I have yet read. Stocks were high mostly on a lot of speculative betting, the buying pressure leveled off, then stocks traded in a range for a couple of months waiting for a catalyst for a correction. I think the crux of the situation is no more complicated than that.

So whether today marked the low for the bottom of this wave or not, I tend to think we are near it. We already started to see some fear abate today in this panic right around some major support level for the stock market. I think when this wave does bottom it will be the end of an Intermediate wave down. Which is interesting as I see all kinds of 'impulse counts' down being armed on so many EW bloggers charts.

My position remains that this is not the 'Top'. I see 'P2' labels popping up all over the place now (after they missed it for months), see Regarding Tops and Sloppy / Misleading EW Practices. But I don't think this is P2 or anything equivalent.

However, I would have seriously considered changing my opinion if the US Government had gone into balanced budget mode, as either a compromise or because of lack of one (if there was no compromise, then the Treasury would have gone into its own balanced budget mode, since it can't make discretionary spending choices, those have to be approved by Congress). If that would have happened it would be the largest anti-stimulus measure likely ever seen. Trillions of dollars would have been sucked out of the economy. See this post for more: Regarding the Myth that Austerity promotes Fiscal Expansion.

But I don't think the macro supports that 'dire' view. For the next couple of quarters, it looks like the budget deficits will be mostly intact. Deficits will still be around 9% of GDP, which is approximately the same as last year (there are some cuts, but they are not huge). And as Warren Mosler pointed out: "The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment." But there are cuts and other headwinds at work. So I still think the next year or so will not be a 'crash', but not 'growth' either. I think we will be mostly rangebound/sideways for the next year. I think it will make for some very ugly trading as people try to understand this environment.

Long term, however, I continue to not be optimistic. I am *very* long term optimistic and bullish about the US economy and American society and resourcefulness. But currently we still have a Financial System that truly is a parasite sucking much of the life out of the economy and giving no productive work back (see Why Deficit Spending and Creative Destruction are not Mutually Exclusive Positions). We still have deficit spending that is simply propping up Financials and the status quo, and is not being geared toward productive economic activity even though we can most definitely 'afford' it (see the previous link for some thoughts).

And perhaps the worst problem is that mainstream economists and politicians still don't understand our monetary system. The idiotic debt ceiling debate absolutely proved that. Everyone (except those of us in the tiny minority) seems to think that "Federal Government deficits = bad, Government surplus = good!" as a blanket statement, without any consideration to what is happening in the other two sectors of the macroeconomy. And so it seems to me that in the next couple of years a "balanced budget" or (God forbid) a "balanced budget amendment" will be passed before the economy is cleaned out. Those who advocate austerity to 'avoid a depression' will be the ones to cause it. Perhaps this isn't a foregone conclusion for the next decade, but it seems like an awfully big risk. (See this post).

So until I see evidence that both Financials are getting broken up and the industry forcibly altered from a 'Too Big Too Fail' condition and widespread understanding of how our monetary system actually works, I do think another economic crisis is likely and my long term projection reflects that possibility.

---

Here is an update on my long term projection. It hasn't changed in the last several months, so there will be no new long term analysis in this post. Just some chart updates and references to my previous work so you can follow why I arrived at this projection.

-- Nov 2010: Abandoned the Primary 2 count and adapted my leading alternate count which was a Cycle X count - The Large Count

-- Jan 2011: Rethought the size of Cycle X with some historical analysis and comparisons. I lay out my thoughts for March 2009 - June 2011 (projection at the time) being only Primary W of Cycle X - The Large Count with Historical Perspective

-- Jan 2011: Macro thoughts that accompany my projection - Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?

-- Feb 2011: Long term context - Secular Bear Market Projection in Historical Context

-- Mar 2011: An in depth study and a comprehensive list of references and analysis of previous work. I highly recommend reading this post and following the references - First Derivative of the S&P 500, Long Term Study

-- May 2011: Count of the large structure (the top of this wave) being completed in real time - May 5 (and a Long Term View Update)

Rally from July 2010 - May 2011. It is corrective, not impulsive. Subsequent price action is also corrective, not impulsive


Last two Primary Waves and upcoming Primary Wave projection


Update on the BPSPX with regard to the last two cyclical bull and bear markets, and the current cyclical bull market (The BPSPX and the Secular Bear Count)


Secular Bear Market Projection

Regarding Tops and Sloppy / Misleading EW Practices

Ever since I learned about Elliott Wave (which I continue to be a huge proponent of) I always listened to myself first. I made my own counts based on the best fit, wave proportionality, impulsive vs. corrective traits, etc. I would looks at others counts after I would complete my own because I was interested in how the rest of the EW blogging community was interpreting things.

As time went on, I started to see a decline in either quality or objectivity (and both are highly related). I saw a lot of rigorous adherence to impulsive up counts despite the obvious problems with such a count. I sought to explain why such counts broke numerous rules and tendencies, by doing detailed historical analysis:

-- Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
-- Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
-- Historical Count: 2002-2007
-- Five-Wave Structures Revisited: The Identification of an Impulse Wave
-- Wave Speeds and Log Charts (and No, the large count is still not an impulse)

However as time went on there was more willful ignoring of these issues. So I stopped following anybody else's Elliott Wave count months ago. I was just seeing so many bad, sloppy, misleading, lazy, erroneous, etc. practices.

For anybody who has been following my counts, I had been maintaining that the move off the bottom was a complicated WXY structure. And because I was not looking for a "5" to complete the move up (because of the numerous previous violations that told me that I shouldn't be) I think I was more objective in watching the waves unfold.

The top of this wave (so far) occurred on May 2. Look at my previous real time posts on that development, one on May 2, and a confirmation post on May 5:

-- May 2
-- May 5 (and a Long Term View Update)

With the strong move down today breaking the June lows, I thought I would check out the EW blogosphere. And sure enough, right up until yesterday everybody was holding out for a Minor 4 triangle and today everybody is switching to a "P2" (which is completely bogus) top on May 2.

Here is a picture of how ridiculous that position is (and how obviously ridiculous it should have been to anyone looking at it objectively).


But!! you say. What about the "Large separation between waves 2 and 4 rule that forces such a count to be an impulse" ??!!

I call 100% BS on that 'rule'. I think it is an EWI ad hoc / made up rule. Balan makes no mention of it in his book, and I consider his book on Elliott Wave to be the most authoritative source on EW (I find it to be much more useful and practical than Frost and Prechter).

This is a topic that has received a lot of comments on my posts over the last several months, and I continue to stick by my position on it.

I would like to share this comment by ZimZeb that summarizes why using an obscure and nonsensical impulse rule as justification to ignore all kinds of non-impulsive tendencies is bad EW practice and leads to bad results (like with everybody who was looking for a 5 wave move up before the 'top').

This count breaks one glaring guideline of Elliott Wave analysis (binve's note: which I take major exception to as being a 'guideline' as I stated above): that five wave structures where the fourth wave does not enter the territory of the first wave should be counted as impulses. What it does not do, however, is try to pawn off as motive waves those which do not follow the channelling guidelines of impulses. Nor does it suggest movements where the third wave decelerates are impulses. It doesn't have impulses which lack alternation, second and fourth waves staggeringly out of proportion with each other, or second waves that offer pitiful, sub-meager-Fibonacci-fraction excuses for a retracement. It doesn't have RSI peaks at the end of wave ones. It doesn't rely on a truncated fifth to call a top or any large running flats to segregate dubiously odd numbered waves. No five wave movements both start with a rare leading diagonal and end with a rare megaphone expanding ending diagonal. It suggests the choppy movements of the two up legs within the larger (admittedly forceful) move from the 2009 low are both corrective. Some claim breaking the one particular guideline it does is an attempt to be overly-cute, but the count isn't posing as some sort of beautiful and unique snowflake. It's just a reflection of the meandering irrationality of uncertainty in the face of conventionally intractable problems. It's pretty ordinary, actually--just like what most of us face every day.

Well said.

First Derivative of the S&P 500, Long Term Study

This is another study that expounds upon the long term analysis and projection for the secular bear market that I have been discussing for the last few months. Please read the following background material:

Suggested reading:

i) Lessons (To Be) Learned... again. - Why secular bear markets have to run their courses, as do cyclical bulls and bears within secular bears.
ii) Inflation V Deflation – Which Door Do You Pick? - List of both inflationary and deflationary pressures currently at work.
iii) Inflation/Stagflation/'Flopflation' - Conditions under which prices are 'sticky' - Why I think calling what we have now 'stagflation' is misleading and will lead to the wrong conclusions. The US private sector is in a balance sheet recession. So the commodity price spikes (checklist's 'flopflation') will not stick because wages will not grow to accept them (hence commodity crashes after the spikes). ⇒ CPI is likely to be very low for the next 5-10 years. ⇒ Nominal Prices and real prices will be approximately the same for the next 5-10 years.
iv) Secular Bear Market Projection in Historical Context - Current thinking regarding the 'shape' of the secular bear market.
v) Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market? - Current thinking regarding the macro surrounding the secular bear market.
vi) The Valuation Bottom of 2009: Rehashing the "Once in a lifetime buying opportunity" argument - While I agree with checklist's value proposition regarding the 2009 bottom, I still think there case to be made that we make a lower nominal and real low.
vii) http://caps.fool.com/Blogs/the-valuation-bottom-of-2009/549216#comment553546 - Summary of the above position
viii) Rebuttal to checklist :) - Rebuttal to the 'unprecedented' 3x >50% declines in a secular bear market claim.
ix) Real Secular Bear Markets

Additional reading:

1) Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
2) Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
3) Historical Count: 2002-2007
4) Five-Wave Structures Revisited: The Identification of an Impulse Wave
5) The Large Count with Historical Perspective
6) The Large Count with Historical Perspective (Part 2)
7) Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?
8) Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'
9) Lessons (To Be) Learned... again.
10) Secular Bear Market Projection in Historical Context
11) Wave Speeds and Log Charts (and No, the large count is still not an impulse)
12) The BPSPX and the Secular Bear Count

Brief Background:

The following is a brief synopsis with charts and sources for the study presented at the end of the post. Please read the above material for a more detailed background.

First is a comparison of previous secular bear markets that have a similar character to the bear market that I believe we are experiencing now. From The Large Count with Historical Perspective

A) The NIKKEI from the last few decades. There are some precedents (especially in an index whose economy faces many similar macroeconomic headwinds we now face) for very complex and sideways X waves.
B) 1966-1975 Bear Market. X waves can sometimes be a simple bridge (like in the triple zigzag on the SPX from March 2009 - Apr 2010) where they are roughly the same same as the B waves in a 7 or 11 wave sequence. Other times X waves can be very complex and sideways and be on the same order of size and time as the W and Y waves.
C) A Study of Historical Bear Markets. The Pragmatic Capitalist put up a very interesting post looking at several bear markets to come up with an "average secular bear market"

This leads me to what I think this secular bear market could look like for the long term:


Next is the comparison of the form of the 1966-1975 bear market to the current ongoing secular bear market. From: The Large Count with Historical Perspective (Part 2)


Here are some additional studies looking at the similarities of the momentum internals between the 1966-1975 bear market and the current secular bear. From: Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'

The 1966-1975 Bear Market:


The 2000-20xx Bear Market:


This is how my secular bear market projection fits within the historical context based on a long term trend channel analysis (see Secular Bear Market Projection in Historical Context):


Next is a study of the BPSPX with regard to the last two cyclical bull and bear markets, and the current cyclical bull market (The BPSPX and the Secular Bear Count)


Finally is a look at Real Secular Bear Markets on a long term chart:


This leads me to my long duration First Derivative Study of the S&P 500. The idea of this study is to look at the first derivative of the nominal price of the S&P 500, to identify patterns and behaviors in secular bull vs. secular bear markets.

My first iteration of this study plotted just the first derivative of the S&P 500 price. This gave a signal that was absolutely useless for long term analysis. The series was extremely noisy (unusably so) and as the price increased over time, so did the derivative (as expected) which gave no insight to the relative behavior of the price action.

My next iteration (shown below) took the first derivative of the 15 day Moving Average. The idea is to take the derivative of a 'smoother' function so that the derivative (which by definition has more noise/variation than the original function) is clean enough and patterns can be discerned. A 15 day MA is a good compromise between smoothing and data loss (important moves will be lost with longer MAs). Next is to take that derivative and divide by the price. This is done to scale the signal so that it's relative size with respect to the original price will be maintained though time.

The study has some interesting results.

First: There is a mean value band within which the derivative spends most of its time (±0.003 on the chart). The majority of the daily noise/variation stays in this band. More significant moves often occur outside this band.

Second: Secular bull markets (green in the chart below) spend most of their time in the mean value band and have only brief excursions / spikes outside the band (the 1987 crash being a glaring exception).

Third: Secular bear markets (red in the chart below) have significant periods of activity outside of the mean value band. This has partly to do with increased volatility in bear markets. But it has more to do with increased and sustained (not simply volatile) down moves as well as sharp upward reactions characteristic of bear markets (which will obviously increase the derivative).

My previous analysis (shown above) has led me to a secular bear market projection, which I show on the chart below, as well as a possible manifestation of the derivative in this context.

The BPSPX and the Secular Bear Count

My friend Columbia recently put up an excellent observation on the BPSPX (http://elliottwavetrendsandcharts.com/wordpress/?p=331). I have been messing around with a long term BPSPX chart of my own. And recent market action is forecasting an important development (assuming my large count theory is even remotely right).

Background:

1) Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
2) Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
3) Historical Count: 2002-2007
4) Five-Wave Structures Revisited: The Identification of an Impulse Wave
5) The Large Count with Historical Perspective
6) The Large Count with Historical Perspective (Part 2)
7) Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?
8) Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'
9) Lessons (To Be) Learned... again.
10) Secular Bear Market Projection in Historical Context
11) Wave Speeds and Log Charts (and No, the large count is still not an impulse)

There are three major observations that I have made with my analysis

1) The P2 count is (mostly) dead. It is still technically possible for the SPX, although many major indices have already invalidated it by making higher highs than the 2007 peak. As soon as the April peak was taken out, I abandoned that count (in November). For more of my reasoning on that, see beginning of this post: Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?

2) The secular bull market count is invalid (i.e. we do not have a major impulse up starting from the March 2009 low). See references #1, #2, #4, #5, and #11 above for (much) more detail on this.

3) The count is significantly more complicated that I think most are assuming. I have seen either a "major" (decades long) top call here, or the resumption of a "Fed-induced" inflation rally. I think both really miss the mark.

I have been studying market internals with respect to this rally and comparing it to 2002-2007 (which I think is a *very* relevant comparison wave). My studies have led me to compare this current secular bear to the 1966-1975 bear market. Not only because I believe they are both 4th waves (I believe 1966-1975 was a Cycle Degree 4th wave and the current secular bear is a SuperCycle 4th wave: Secular Bear Market Projection in Historical Context), but also because the internal wave structures and the wave momentum characteristics are remarkably similar.

From Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching':

The 1966-1975 Bear Market:


The 2000-20xx Bear Market:



This leads me to my BPSPX (Bullish Percentage of SPX stocks) observations. My BPSPX study goes hand in hand with my 'price stretching' study above.

First, here is the chart and I will discuss observations below:


Observations:

A) This is yet another reason why I don't think a 'major' top is occurring here (i.e. the end of P2). The BPSPX this week made its highest reading ever. But we can clearly see from the last two major peaks that the BPSPX does not peak at the end of a rally. It peaks well before the end (usually by a couple of years).

This very much goes in line with all of the sentiment surveys, and the people interpreting them saying "major bullish sentiment is the sign of a top!". While it is true that bullish sentiment accompanies tops, simply because we have bullish sentiment doesn't mean we have a top. Right now we are in the phase of 'it takes bulls to make a bull market' (as Guy Lerner points out). So I am much more inclined to see bullish sentiment as a coincident indicator rather than a contrarian indicator. There will be a time in the future when other drivers are in divergence (such as analysts estimates compared to actual earnings) and this does eventually become a contrarian indicator again. But (IMO) that time is not now.

So based on the behavior of the last two major market tops, the BPSPX is saying that this is likely not a major market top. The VIX is also saying the same thing: The VIX and Market Tops and Bottoms

B) The BPSPX (during 2002-2007) peaked at the end of the first leg of the rally, right before a consolidation period. And I think a similar setup is now occurring.

Many want to see the A-B-C type move from 2009-now as a 'complete' wave. But I think that is incorrect. I think it is simply the first phase of a larger move. I think the corollary is the 2002-2007 wave. But whereas the 2002-2007 was a Primary Degree Wave (Primary B of Cycle W), I think the current wave is a Cycle Degree Wave (Cycle Degree X of SuperCycle 4). As such, the wave structures will be larger and take longer in comparison. We saw the exact same behavior in Cycle Degree 4 (1966-1975. Look at Intermediate X of Primary W in comparison to Primary X. Same basic shape and wave characteristics, but Primary X was larger and took longer to complete [as expected]).

C) Nobody (well, maybe the minority) is expecting this. Again, I see mostly major top calls or a huge continuation of the rally to 1400-1500 (or higher!) in the current leg of the rally. I have seen very few calls for a consolidation for a year or so. Yet, I think that is exactly what we will get.

So my theory either has the contrarian edge ... or it is complete garbage :)

Wave Speeds and Log Charts (and No, the large count is still not an impulse)

Here I am still harping on two things. You are probably as tired of hearing them as I am of saying them. But I have to keep bringing them up because they are important.

1) Why charting must be done using a vertical log scale **

I went though this in detail here: Why Arithmetic Stock Charts Are Worthless. If you haven't read it, read it. Seriously.

Stock price movement is logarithmic / exponential. Sorry, this needs to be emphasized. ALL GAINS AND LOSSES IN THE STOCK MARKET ARE EXPONENTIAL!! NOT ARITHMETIC!!. To see why, consider this example:

Is a 200 point move equivalent to any other 200 point move? NO. If 200 point move A occurs when an index is at 4000 (5%), it is much less meaningful than if a 200 point move B occurs when an index is at 500 (40%).

This is why linear scale stock charts are almost meaningless.

Because we don’t measure stock performance on an absolute basis, we measure it on a RELATIVE basis. A 50% gain is a 50% gain. Whether you bought a stock at 10 and it moved to 15 or you bought the stock at 1000 and it moved to 1500. This makes all gains and all moves in the stock market exponential / logarithmic.

Stock data on a linear chart improperly exaggerates the importance of moves at the top of the chart and improperly diminishes the importance of moves at the bottom of the chart!.

The other reason why this is important is in measuring wave speeds. Historical comparisons cannot done on a "points per day" basis, for the same reasons listed above. After a large wave advancement, a 10 point per day move with an index at 4000 is much less impressive than a 10 point per day move with an index at 500.

Since all growth in the stock market is exponential, you want to figure out exponential growth rates. A straight line on a log scale means "a line of constant exponential growth". This is a much more meaningful way to compare wave sizes when it has moved over a large distance (such as a move in the SPX from 700 to 1300).

** NOTE - There is an exception to this general statement that arithmetic charts are worthless. It is the crux of Gann's analysis, and arithmetic charts are critical to this analysis. Because there is a *very* specific way you must set up your templates to make them work. And when you do, very specific angle relationships show up that otherwise won't.

But in general an arithmetic chart with no special format will not give you proper relationships on a trendline analysis.

2) The move off the bottom is not an impulse, and continues to not be an impulse

Please see these references:

1) Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
2) Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
3) Historical Count: 2002-2007
4) Five-Wave Structures Revisited: The Identification of an Impulse Wave

There are no absolutes in the stock market. There are exceptions to almost every rule. And you have to deal in probabilities. So I can't say definitively (just like no one can) that the move is not an impulse. But based on how many tendency violations (and indeed at least one 'rule' violation) there are in the wave from the 2009 bottom, you would need to assign a very low probability to the impulse count. Maybe the low single digits.

In no way should it be a primary count, and anyone who says that it is an impulse above all other possibilities, is doing a huge disservice to everybody.

Are we in a bull market right now? YES! Absolutely!

Are all bull markets impulses? NO! ABSOLUTELY NOT!

This is the source of the problem. Many want to see this as the beginning of a secular bull market, even though the internal wave structure does not even come close to conforming to one.

This is a very powerful cyclical bull market. And I think it will likely continue for years. But it can absolutely be a corrective wave structure and still be a cyclical bull market. Want proof? Just look at 2002-2007. We have a prime example in just the last decade (including numerous ones over the past 100 hundred years).

Secular Bear Market Projection in Historical Context

I would like to show how my count of this secular bear market fits within the long term context.

In order for that to happen, there is some background information that is needed, which gives the order in which I have reached my conclusions:

1) Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
2) Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
3) Historical Count: 2002-2007
4) Five-Wave Structures Revisited: The Identification of an Impulse Wave
5) The Large Count with Historical Perspective
6) The Large Count with Historical Perspective (Part 2)
7) Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?
8) Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'
9) Lessons (To Be) Learned... again.

First we start with the last major impulse wave, which was the Supercycle impulse from the end of the Great Depression until the 2000 market peak. I discussed those counts in Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally

The previous Supercycle Degree Impulse (1933-2000)


The previous Cycle Degree Impulse (1975-2000)



Next is the comparison of previous secular bear markets that have a similar character to the bear market that I believe we are experiencing now. From The Large Count with Historical Perspective

A) The NIKKEI from the last few decades. There are some precedents (especially in an index whose economy faces many similar macroeconomic headwinds we now face) for very complex and sideways X waves.
B) 1966-1975 Bear Market. X waves can sometimes be a simple bridge (like in the triple zigzag on the SPX from March 2009 - Apr 2010) where they are roughly the same same as the B waves in a 7 or 11 wave sequence. Other times X waves can be very complex and sideways and be on the same order of size and time as the W and Y waves.
C) A Study of Historical Bear Markets. The Pragmatic Capitalist put up a very interesting post looking at several bear markets to come up with an "average secular bear market"

This leads me to what I think this secular bear market could look like for the long term:



Next is the comparison of the form of the 1966-1975 bear market to the current ongoing secular bear market. From: The Large Count with Historical Perspective (Part 2)



Here are some additional studies looking at the similarities of the momentum internals between the 1966-1975 bear market and the current secular bear. From: Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'

The 1966-1975 Bear Market:


The 2000-20xx Bear Market:



Finally when I smash all that together, this is how my secular bear market projection fits within the historical context:



There are a few things to notice here. I am differing from the view presented in Frost and Prechter: The Elliott Wave Principle where the Great Depression was actually a Supercycle 4th wave. I don't like that idea. Two's are very often the sharp, fast and deep retrace waves, and Four's are commonly the sideways waves. We even see that behavior in the wave form at the Cycle Degree from 1933-2000.

Columbia and I have talked about this before, and I believe we are thinking along very similar lines. We have some differences in our large counts (here are his latest thoughts on the long count), but the overall jist is similar.

Whatever count precedes the 1929 peak (and there are many theories on it, absolutely no one has a 'lock' on that count), I think we are still in a Grand Supercycle impulse. And I think we are in the 4th wave of that impulse. And yes, in the historical context, I think this will amount to a relatively sideways wave.

Impulsive vs. Corrective

Is the wave since July 2010 an impulse wave, or a correction?

Us Ewavers are trying to answer that question. And the answer is: it is not clear cut at all.

I have done quite a lot study regarding impulsive waveforms and how they manifest beyond the standard textbook definitions (see Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave, Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally, Historical Count: 2002-2007 and Five-Wave Structures Revisited: The Identification of an Impulse Wave)

I understand the impetus for wanting to count it as an impulse. People want to count it as a 5-3-5 zigzag for P2. Or even a 1-2, 1-2 up for a new bull market. But quite frankly, I think both of those counts are bogus as I discussed here.

Here are a few thoughts regarding the degree to which the July 2010 - now wave exhibits impulsive characteristics.

The July 2010 - now wave is a better fit for an impulse than the Mar 2009 - Apr 2010 wave is. .... And that is about as strong as the argument gets (i.e. not very).

- Two is a deep retrace wave. (Ideal)
- Alternation in both form and severity between 2 and 4 (Ideal)
- Minor 3 accelerates relative to Minor 1. Not overtly so however (Acceptable)
- The internal wave structures of both Minor 3 and Minor 5 are not clearly impulsive (Non-Ideal)
- If Minor 3 were "lazy" (which it is) then Minor 5 should be very strong and cleanly impulsive. That is not occurring (Non-Ideal)
- Clear deceleration as the Minute subwaves progress (Non-Ideal)
- In the Minute subwaves, there is clear overlap in the middle of the wave right where the 3rd waves should be extending, or at the very least the most impulsive (Non-ideal)
- First wave are the strongest Minute subwaves in both Minor 3 and 5 [see relevant observations here] (Non-ideal)

So how does this stack up as an impulse wave? I would give it maybe a 4 or 5 out of 10. .... Far from a ringing endorsement.

I was reserving judgement on the impulsive vs. corrective call because I wanted to see how Minor 5 played out. If Minor 5 turned out to be a clean impulse, then some of my observations above would have turned to support for an impulsive count. But Minor 5 has turned out to be very similar in character to Minor 3, with the same mid-wave deceleration and overlapping.

In short, I don't buy the wave as an impulse.

I think the corrective option is a much more compelling fit.


Either way, I don't much care. I still do not think that whenever this wave ends that it will be the 'top' before a major downleg / crash. I think there is still more in the tank of this cyclical bull (even though there will be increased volatility in the coming years) before the secular bear market resumes.

I continue to think that this secular bear market is far more complicated than most are assuming

See more thoughts here: Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market? and here: Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'