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

Tuesday, January 31, 2012

Jan 31

Well, the first At Bat for the 60-min Trend System trend system this year was a strikeout (3 swings and 3 misses). Now it is back to the plate again and saying that a 60-min turn is happening. Hopefully this one isn't another 'curveball' and fares better.

But the Daily Trend signal is still on a buy. So whatever happens here on the 60-min timeframe, from a daily standpoint I am expecting higher highs. If this ends up being a tradeable pullback (and keep in mind the last 3 weren't), then I think it will end up being a dip to buy in the larger cycle sense.

Saturday, January 28, 2012

Long Term Technicals and Macro

As much as I like and use Elliott Wave (and I do), it is not my 'primary' analysis method. Readers of this site know that I perform macro analysis as well as TA to understand where we are in the cycles. I use EW in conjunction with all of my other analysis, because I find (for me at least) that a balance of everything is required to stay objective. This is another reason why I have different time periods with my Trend System, because things move differently on the 60-min timeframe vs. the Daily timeframe vs. the Weekly timeframe. I know (as should everyone) that every downturn in the market is not 'the top', that there are many corrections in ongoing bull markets. Not every cycle moves in conjunction and shorter cycles can move in the opposite direction of longer term cycles, and these manifest as either good buying or shorting opportunities depending on the longer term cycle direction.

But to get to the point of this post, it is a look at where we are in the current cyclical and secular market cycles. No 'projections' (only some rough directional calls), no Elliot Wave, just some simple TA sprinkled with a few macro observations.

The Current Cyclical Bull Market

We are in a cyclical bull market. One began in March 2009. Making the current cyclical bull less than 3 years old. Do I think this cyclical bull market is over? No. There are a number of reasons why I am not looking for a 'major top' here (and think that one did not happen in May 2011).

-- Moving Average 'Price Stretching' Update, Nov 2011
-- BPSPX Update, Nov 2011
-- 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

All of these studies look at the trends of market internals as well as earnings and corporate profit margins, and show why the odds of a major top occurring in the middle of 2011 are highly unlikely. Here is some more evidence:

The Nasdaq 100 has already made new recovery highs. Technology is a critical component of the modern economy and the Nasdaq 100 has been an undisputed leader in market cycles: It peaked decidedly in 2000 while the rest of the markets hung around for a few months, it made a definitive low in 2002 while the rest of the markets were retesting in 2003, it made a bottom in 2008 and only retested it while other market made lower lows in 2009. So anyone who calls a 'major top' here while an undisputed leader index is making new recovery highs is making a very uninformed/biased call indeed:

Looking at the market internals we see any call for a top is extremely unfounded:

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.

Here is just a clean look at moving averages and comparisons between bull and market cycles. And like I observed on my BPSPX post (BPSPX Update, see the original post in the link), bull markets top as 'processes' not 'events'. Things peter out and roll over. This is not at all what describes the 2011 top


From a macro standpoint, the United States is still acting in a manner that can continue to be supportive of a bull market. Please see the introductory macro thoughts in this post: Update on Long Term Projection.

The United States Government is still continuing to run large deficits, which it needs to in order to support the savings desires / paying down of debt in the private domestic sector and to support aggregate demand. And for all of you who think (incorrectly) that "deficits are always evil, will crowd out private investment, will raise interest rates, will cause hyperinflation, will anger the US bond market vigilantes" or whatever mainstream uninformed macroeconomic myths that you are adhering to, read this post: Why Deficit Spending and Creative Destruction are not Mutually Exclusive Positions, and then after that read these posts: Regarding the Myth that Austerity promotes Fiscal Expansion, What would happen if the US Federal Government stopped issuing bonds?, The Real Macro Risks.

The Ongoing Secular Bear Market

Yet things in the economy are not hunky-dory. We still have a financial system that was never reformed at the end of the last crisis, that still takes enormous risks, and is still a massive parasite/drag on the economy due to it size and non-productive nature (it exists only to extract economic rents). See section 5 near the end of this post.

Additionally demographics will have headwind on the economy for the next 10 years. Retiring baby boomers (in increasing numbers) will be selling assets (stocks, bonds, houses / downsizing) and reducing consumption as they go through retirement. Many also were counting on pension benefits that they no longer have which will also put a headwind on asset prices.

The environment (in most developed economies) is not conducive to economic expansion. People are downsizing and selling as a whole (the biggest segment of the economy) as well as the majority of the economy (including boomers and many other segments) are still in a balance sheet recession.

Also corporate profit margins are near a cycle high. And while that means that I don't think right now is the end of the cyclical bull (precisely for that reason), it means that the next peak in the stock market in a few years will happen on lower profit margins and lower earnings (likely revenues will start to weaken as well). This is part of the rolling over 'process' (tops don't happen on earnings and margin expansions, they tend to happen on downside of a compression cycle).

On top of that, while the US government is running significant deficits currently, deficit hawks and austerity rhetoric ('the US is going the way of Greece' and other such nonsense, if anything the US is going the way of Japan) are becoming more prominent in the media and in Congress. This bodes very badly for the US macroeconomic environment for the next several election cycles if that sentiment (which is becoming increasingly popular) starts to take hold and significantly affects fiscal policy decisions.

For those reasons and many more I continue to think that the secular bear market which started in 2000 is not over.

I have done many studies on secular trends, but sometimes the simplest ones are the cleanest.

This is a look at the last two major secular bears in real terms. I fully understand that three periods is not a significant statistical data set, but these secular periods take a long time to unfold (and hence there are not many to analyze). Likely most investors ever live though only one secular cycle (upside and downside). Doing an examination of this chart, we can see that in comparison the current secular bear market would be historically truncated time-wise if it ended in 2009. Additionally from a channel analysis, whether you consider the based channel or the channels to be accelerating up, at no point did we revisit any of the lower channel lines.

However, the last cyclical bear market was severe and retraced nearly the full amount in price (compared to the other two). This is reason (among many others) why I don't expect a much lower low (if at all) than the 2009 low. Certainly nothing like a 'triple-digit Dow' or anything like others are calling for.

I simply think there is going to be one more cyclical bear to finish out the secular bear.

Thursday, January 26, 2012

EW Shenanigans

There are still a lot of 'Minor 1 / Minor 2, start of P3' myths floating around. Please read this post as well: Regarding Tops and Sloppy / Misleading EW Practices

Monday, January 23, 2012

Jan 23

Three swings and three misses. That's a strikeout.

The topping signal on the 60-min system that happened last week has now completely cleared without ever having a selloff. The strength of the buy signal on my Daily Chart has been enough to keep pushing the market up despite the shorter term (60-min) divergences.

It seems to me that the 'volatile/swing traders' market of the last 6 months has been replaced with a 'grinding/the trend is your friend' market.

Props to everyone (which is not me) who stayed long since Christmas.

Monday, January 16, 2012

Jan 16

Current EW count for anybody that cares. If we get a pullback this week, then I think it could be a retest of the breakout. And yes, I do think it would end up being a good dip to buy.

Friday, January 13, 2012

Jan 13

I have been very busy, and with how sideways / ridiculous the market has been the last 2 weeks it has been a perfect time to be laconic.

My 60-min system has been trying to roll over and the market has faked it out a couple of times recently (2 swings and 2 misses since the new year). Today looks like a pretty large island reversal. So following the system and going short again.

Tuesday, January 3, 2012

Update on Long Term Projection

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)

-- 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

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

Alternate View: Looking at the large scale triangle formation and a count that might go with it. The point being that this is another way to look at the large scale structure. But whether it is counted in the above manner or the below manner, the overall structure and projection is approximately the same. See this post for where the idea was originally explored.

Update on studies that support the hypothesis that we are in the middle of a cyclical bull market, not at the end of one:

-- Moving Average 'Price Stretching' Update, Nov 2011
-- BPSPX Update, Nov 2011
-- 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

Secular Bear Market Projection

Monday, January 2, 2012

Jan 2

Just a quick 'Year in review' for my 60-min Trend System:

For a very volatile year (SPY 2011 -- Net Change: 1.9%, Max: 9%, Min: -11%) that was basically sideways, I am quite happy with my system's performance.

Here's to good trades for everybody in the coming year!