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

Wednesday, April 11, 2012

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.

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