I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Sunday, August 15, 2010

Where we are: The Long Count and some thoughts

Just thinking and reading this weekend, and decided to update some of my charts on the long counts and to revisit / reiterate why I continue to be bearish on equities as a general asset class.

First the macroeconomic and fundamental pictures.

I have written so many posts on this, so there is no need to regurgitate them again. I am bearish, and I believe there is a well-founded reason to be so. For my posts pertaining to this, see:

-- Long Term View
-- Bond Market and Yield Spread Update
-- What the Bond Market is Trying to Tell the Stock Market: A Look at the Yield Curve and Expectations
-- US Dollar Count Updates
-- Bigger Fish to Fry, and update to Moving Some Macroeconomic Deck Chairs: The Dollar, Dollar Swaps, Bonds and LIBOR
-- Moving Some Macroeconomic Deck Chairs: The Dollar, Dollar Swaps, Bonds and LIBOR
-- Of Modeling, Risk, Financial Innovation, and Liquidity Crises
-- Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
-- Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
-- Connect the Dots Before Financial Depressurization
-- Is the Market Fairly Valued? Did the Market Achieve Any Meaningful Bottom Back in March?
-- Debt Saturation
-- Global Macro Investor August Report - This is a Must Read
-- The Big Interview with David Rosenberg
-- What is the Consumer Metrics Institute Growth Index saying?
-- Rear View Looks Fine, But The Macro Forward Outlook Is Deteriorating
-- John Hussman: Recession Warning (Unthinkability is Not Evidence)
-- Buying dimes with dollars is bad business, government-funded or not

to name a few.

I think we are in a secular bear market. I think we are not at the end. I think we are not near the end. I think March 2009 was not the bottom (Is the Market Fairly Valued? Did the Market Achieve Any Meaningful Bottom Back in March?), neither fundamentally nor macroeconomically.

So where are we? Here are the 3 options that I think are the most likely

1. We are in cycle wave C

We have a large impulse down to complete before this bear market is over. The implication that we are in an impulse means that things are going to deteriorate precipitously over the next couple of years. The most obvious and likely catalyst for this to happen is a massive sovereign debt crisis in the world's advanced economies. I have talked about this view, ad naseum, especially if you are a reader of my Caps blog.

2. We are in Cycle Wave Y

We have a corrective move down from these levels. This would be equivalent to a Great Depression (I) type move. After the crash in 1929, there was a 50% rally in 1930. Then from 1930-1933, there was a crushing, overlapping bear market. If you go back and look at the daily and weekly charts, while sharply down, the move is not really an impulse. There was a lot of overlapping moves. I am sure every down move and subsequent sharp rally made everyone think "the bottom is in!" only to be crushed over and over again.

.... This move would suck. Precisely because of the fakeout effect described above. At least with the impulse count, there will be a P3 which will tell everybody "this is *not* the bottom!" and to serve as a more readable technical setup.

The macro picture here would be not a wildfire of sovereign defaults (such as Option 1) but maybe a few interspersed with some massive intervention by central banks. This would serve to "bounce" each crisis for a few months (B and X waves) but then go to new lows after the market decides all of the new debt to stop these crises is *not* a good thing (A and C waves)

3. We are in Cycle Wave X

This is the crushing deflationary Japanese style multi-decade bear market nightmare. See this post for a preview if option 3 were to play out: Back at Support

More thoughts:

Notice that I have a specific range of outcomes, between 400 and 100 on the SPX (roughly 4000 to 1000 on the Dow) for the next 5-10 years. And my preferred count is at the higher end of that range.

I am not a 100% "deflation-scenario" believer. I do not believe cash will be king. Please see my logic in this post: US Dollar Count Updates. There are those that believe in a triple digit Dow endpoint, and I am not one of them. In fact, I am quite bullish over the long term, and I do not consider myself a permabear. I simply recognize the macroeconomic problems we face, and the current fundamentals of the market and what is priced in, and the lack of political will to sustainably fix these problems (much less even admit the magnitude of the problem to begin with). This is fundamentally a debt crisis. But at the end of the day, the debt will have to be dealt with one way or another. And when it does, the world can get back to solving problems and increasing the quality of life. This is why I am a long term optimist: Why I hold Gold: Why I am a Long Term Optimist and consider holding gold and Optimistic Endeavor, and Why I think the Stagflationary Scenario is more likely Macroeconomically in the Intermediate term (next several years)

... Just recognizing the problems we face, I am adamantly not bullish on equities for the next 5-10 years.

So if you want a bullish option from here, go read another blog. I am not bullish. Even if we somehow eek out positive GDP growth from here on out, I doubt it is much over 1%. And as Gary Schilling correctly points out, we need 3.3% GDP growth just to keep the unemployment rate stable. So if you want to be a bull here and count the waves up as a 1-2, 1-2, then power to you. I will simply not indulge in that fantasy on this blog.

Detail on Option 1:

Because I think a Sovereign Debt Crisis is the biggest impact event on the macro horizon and one that has a (IMO) higher than commonly acknowledged probability of occurring, here is my preferred count in more detail.

Just some macro and technical thoughts from the fringes of the blogosphere.
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