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

Thursday, December 31, 2009

Happy New Year!!

I wish all of you a Happy New Year, filled with good fortune and happiness!!

we'll take a cup of kindness yet, for auld lang syne

A Further Step Back

I was taking a look at the Intermediate and Primary Degree Waves a few days ago (Just a Step Back) as a yearly wrap up. I want to take a moment and look the the Primary and Cycle Degree Waves in this post.

I performed detailed FA and TA of the macro picture and drivers for US equities in this recent post: The Long View. And like I said in it, it is only one possibility. From that post:

Even I don't put a 100% chance on the scenario I describe in this post. I am an engineer. I deal with probabilities, and conservative analysis. From a structural standpoint, you have to design for load cases. Load cases are determined from the design environment, but are also determined probabilistically based on past data. You might have an extremely high transient load case, but its chance of occurrence is 1 in 1000000000. But its impact if it does occur: catastrophic. So you must design for these cases. Then there are other load cases where the damage might be high but not catastrophic. You might used a 3-sigma environment for these.

My point is, as thermal analyst and structural analyst, I must be a good engineering risk manager. As a stock market analyst and investor, I view my role in *exactly* the same way. What are the possible outcomes? What are their likelihood and impacts? What are their overall risk profiles?

This is why I go to the trouble of all of this fundamental analysis from the macroeconomic perspective. I am trying to assess the likelihood for economic recovery vs. economic catastrophe. This is why determining what is real GDP growth vs. what is due to government intervention is critical. This is why money supply policy and growth is critical. This is why understanding sentiment and social mood is critical. etc.

My assessment would go something like this (keep in mind, this is just one analysts take):

1) The bottom was in on March 9, 2009 and this is the start of a multi-year bull market.
Odds of occurrence: very low.
Impact: high (being severely short a strong bull market would be detrimental to your portfolio)
Overall Risk Assessment: medium-low

2) Drift higher into the middle of next year and then start heading down
Odds of occurrence: medium-low
Impact: medium-low (I build enough cushion into my positions that I can afford to have them go against me up to a point)
Overall Risk Assessment: medium-low

3) Trade sideways / rangebound for the next several years into what amounts to be a Cycle-Degree X-Wave
Odds of occurrence: medium
Impact: low (If we are range bound for years, there will be opportunities to exit shorts and to go long to play the range)
Overall Risk Assessment: medium-low

4) The count I show in this post plays out (Primary 3-4-5 down)
Odds of occurrence: medium-high
Impact: very high
Overall Risk Assessment: high

So, for myself, when I look at all of the scenarios, it is clear to me that scenario 4 is the clear one to hedge against.

So I wanted to explore scenario 4 just a little bit more, since if it does come to pass will be a serious event.

I have shown this chart of the long term Dow in a few different posts:

But let me take a moment and show the three major US indices side by side, so we can examine the overall behavior the last 30 years in context.

First I have said that the end of the 67-year bull market / start of the secular bear was in 2000, not 2007. I say this for a few reasons:

1) When adjusted for inflation, the 2007 peak on the Dow is lower than the 2000 peak
2) When looked at in terms of Gold, the Dow / Gold ratio has a higher peak in 2000 vs. 2007
3) The kickoff of the "Bubble Era" originated by the Tech Bubble bursting gives the Nasdaq a huge blow-off peak.

The NIKKEI in 1990 shows similar behavior to the Nasdaq in 2000 (from If I had a NIKKel for ....)

The SPX had a deeper pullback in 2008-2009, but the 666 bottom is nowhere near any meaningful long term support.

The Dow has been holding out, it has been showing the strongest long term technicals. How long does it hold out?

So, what is the ultimate message of this post?

The point of this post is NOT to say the crash is happening tomorrow. These are very long term charts and long term trends take a ... well, long time .... to develop.

The point is to show the size of correction so far with respect to the previous large bull move and how these stack up against each other on the three main US equity indices.

You should ask yourself: Does the behavior look strong or weak among the 3? Does this look like topping action with respect to the long term Moving Averages or does it look like the start of a new bull market?

I am not trying to convince you of anything. I am just showing a not-often-looked-at view of long term equity movement. I am asking you, "What do you personally make out of this?". You might look at these charts and say "that's bullish!". Or you may look at them and say "that's bearish". Or you may say "This? Why, I can make a hat or a brooch or a pterodactyl". And in keeping with the risk assessment above, scenario 4 is the one that I choose to hedge against, so I am highlighting the bearish possible outcome. But really I am just offering these up for your consideration.

Addition - Dec 31 9:45

Long term Dollar / Yen Comparisons

Wednesday, December 30, 2009

You My One-Eyed Crab

We are in the middle of silly season. The market is meandering like a piece of tissue paper blowing in a bullish breeze.

So to add a little lightness to the Holiday Season, I wanted to share a picture that amuses me a lot. Our cat got a catnip stuffed crab for Christmas and within 2 minutes he tore one of the felt pupils off the poor crabs eyes

So I have the line "One-Eyed Crab" stuck in my head, to the tune of Brown-Eyed Girl of course :)

Just sharing a little bit of binv's insanity. Be thankful, this is just one post. I have to live with myself every day .... :)

Gold Miner Performance: A Look At Miner Cost Inputs vs. Gold Price

Many of us who are bullish on gold and gold miners often talk about the Gold / Oil Ratio (GOR). The reason why this is of interest is that metal mining is a very energy intensive endeavor and the price of oil is the biggest cost input for GSMs. But just because the price of oil is high or low does not determine profitability. If the price of oil is high but the price of gold is higher (on a relative basis) then miners can still be profitable.

In order to determine profitability for a gold miner, as an individual company, you must look at the "All-In" Extraction costs: Energy inputs (are they hedged or not, what is the value of the energy hedges), ore grades in the mines, metal by-products, environmental costs, mine types and ore transportation, etc, all vs the price of gold (do they have gold hedges in place? What are some likely targets for gold prices?).

But stepping back and looking at the big picture, I want to show the impact of the biggest factor (energy prices) and how the Gold / Oil Ratio and the price of Gold affect the performance of Gold Miners as a sector. I will be using the HUI for this study since the HUI is a basket of unhedged (no gold hedges) GSMs.

Since 2000 gold has been in a strong bull market. The HUI has also been in a strong bull market, but has seen a lot more "stair-stepping" in its performance. And you can see from the chart above, that its consolidation periods coincide with unfavorable trends in the Gold / Oil Ratio.

If you are bullish on Gold and you are bullish on Gold Miners, the question you need to ask yourself is: Will Gold outperform Oil in the future (near term and long term) and during the next phase of the credit crisis (assuming we have one)?

My own opinion is that: Yes, I think the price of Oil will rise. Yes, I think the price of Gold will rise. Yes, I think Gold will Outperform Oil. Yes, I think there will be another phase of the credit crisis. Yes, I think the correlation between the HUI and the stock market as a whole will diverge, as the HUI will represent a sector whose bottom lines are increasing and the SPX (for example) will not.

But I am not trying to convince you of this. I am simply showing you a useful evaluation tool at the macro level, so that you can make sense of the behavior of a very important equity sector. The conclusions you reach for yourself are up to you.

Tuesday, December 29, 2009

Just a Step Back

I have showed these charts before, but just wanted to give an update on the wave structure for Primary 2. And yes, it looks like it is finishing up.

Few interesting relationships with this count:

-- P1 = 17 months, P2 = 10 months => P2 ~= 0.62*P1 in duration

-- P2 ~= 0.5*P1 in size

-- Int W = 3.4 months, Int Y = 5.6 months => Y ~= 1.62*W in duration

-- Int W = 290 pts, Int Y = 275 => Y ~= 1.0*W in size

There is a lot of nice Fibonacci proportionality happening at the Intermediate and Primary Degrees.

Two Great Tastes That Taste Great Together

Actually, these counts do not taste great. In fact, if I had to identify these two tastes, I would call them "rotten eggs" and "vomit" ... I don't know, "puke" has a certain guttural allure about it. Okay "rotten eggs" and "puke" it is! Nothing about the counts during silly season make much sense. Here are the two main options again (from my point of view at least).

Based on how the price has been meandering up, with no bearish resistance, on little breadth and volume, makes me think we will have no real pullback at all until Minor C is done.
If this observation is valid, then I tend to favor the triangle option at the moment.

Monday, December 28, 2009

PSW: 2010 Outlook – A Tale of Two Economies

New article by Phil of Phil’s Stock World: 2010 Outlook – A Tale of Two Economies

... In the past quarter century, the inflation-adjusted household income for the top 3% of Americans has tripled while the other 97% have gained about 50%, roughly 2% per year over inflation. Since 1979, 80% of the vast GDP growth in the United States has been diverted to less than 10M of its citizens, while the other 295M people struggle to maintain their lifestyles. Forcing the vast majority of Americans into a life of wage slavery has, of course, been an economic renaissance for those of us fortunate enough to be at the top of the economic pyramid.

Since 1979, the hourly earnings for 80% of American workers (those in private-sector, nonsupervisory jobs) have risen by just 1 percent, after inflation. The average hourly wage was $17.71 at the end of 2007. For male workers, the average wage has actually slid by 5 percent since 1979. Worker productivity, meanwhile, has climbed 60 percent. If wages had kept pace with productivity, the average full-time worker would be earning $58,000 a year; $36,000 was the average in 2007. The nation’s economic pie is growing, but corporations by and large have not given their workers a bigger piece but have instead, kept that 60% gain almost entirely for themselves. ...

Is the Market Fairly Valued? Did the Market Achieve Any Meaningful Bottom Back in March?

This is a follow-up post to my last large Fundamental Analysis post The Long View. I explored many topics including valuations in that post. I would like to talk about valuations in a little more detail here.

I can just here it now: "binv, would you just shut up about this! Ever since the 1990s there is just a new valuation paradigm and you should be comparing valuations in this context. As such the market is not overvalued, or is closer to fairly valued in this context"

There have been many arguments made in response to my posts that are materially similar to the statement above.


No sir, not one bit. Because once you strip away the fancy words, the statement above says "This time its different. We are much smarter / cleverer / more sophisticated (pick your adjective) than people were back 50-100 years ago and therefore all the rules have changed".

And I disagree.

Why? ... Because the same emotions that drives overvaluation (greed) and undervaluation (fear) exist exactly the same today just as it has ever since the invention of money.

Exuberance can last a long time, decades in fact. So much so that investors buy their own hubris. Monetary policy can distort signals and show nominal growth in asset classes such as equities and suppress signals in the bond market further distorting the "fairly valued" signals. But this is ultimately a transient event. The "transient" may be so long that investors not looking at the big picture will call it the "new normal". Government manipulation of market forces is a delay tactic. Because the government has no wealth of its own, it only moves around wealth (very inefficiently) within the economy, consuming a large portion of it. And market forces, at the end of the day, will decide the amount of debt the Treasury can sell and what interest rates are. (The caveat being that there is no limit to the amount of debt that the Fed can monetize - including Treasury debt. Which, as long as there is a Fed, is ultimately why the outcome will be inflationary, not deflationary. Deflationary impulses against the backdrop of massive inflation. Most assets you own fall in value and most assets you need to buy/consume rise in value). But the market emotionally high overshoots are met with emotionally low overcorrections. Everything runs in cycles.

And I think this down cycle is far from complete.

I do not expect agreement on this post, nor am I looking for it. Whether you agree with it or not is immaterial. I have an opinion and I am sharing it. Hopefully you find this useful in trying to understand the big picture. If it does (even if you come to the completely opposite conclusion that I do) then this post did its job.

Required Reading / Sources for this Discussion

-- The Long View
-- Sentiment: P/E, BPSPX, VIX and CPC
- Thoughts on the Dow/Gold Ratio
-- http://www.zealllc.com/2007/longwave3.htm
-- http://www.econ.yale.edu/~shiller/data.htm
-- Regarding Economic Debates and Opinions: The Fallacy of "Purely Objective" Analysis

Main Analysis Point

I will assume you read the links above. These discuss the fundamental case that I make for the current overvaluation of stocks (as a general asset class) relative to the current economic conditions, and how valuations did not, at any point in the crisis since 2000, reach anything approaching a valuation bottom when compared against the historical record.

I discussed valuations using both GAAP and Operating Earnings back in October (Sentiment: P/E, BPSPX, VIX and CPC), and I will take a slightly different approach in this post: I want to examine P/E and Dividend Yields for nominal and real rates using Professor Shiller's data.

But first, to go along with the prologue above, let me reiterate that valuations, especially when viewed in a long term context, are as much a sentiment tool as they are an objective analysis tool.

Let's think about what P/E means. It is the the "payback period" for a stock's current earnings to justify/cover the current share price. Another way to look at it is the *premium* that you place on the stock's ability to generate future earnings. Earnings theoretically grow for growing companies, or they are stable and consistent for well-run companies. But shouldn't a P/E for a particular company or even a sector be a well-known and consistent metric? Why would anybody pay a premium on P/E beyond the historical average P/E?

Because investors are emotional. They fall prey to greed and fear, optimism and pessimism.

Moreover, large scale herd-behavior for optimism and pessimism actually runs in cycles. Read this article, it is a fantastic description of this valuation cycle: http://www.zealllc.com/2007/longwave3.htm. The main upshot of the article is that these long valuation waves take about 32-36 years to run, the last bottom was in 1981, and valuation bottoms do not occur until the broad market (as measured by P/E's on the Dow or the S&P 500, which have very similar P/Es most the time) P/E is between 6-10. Long Term (100 year) average P/E is ~14.

People right now are buying the hype. They buy the upgrades from Wall St. analysts. They buy the "turned the corner" rhetoric from economists. Nobody seems to remember this from the 2007 top or the 2000 top. SENTIMENT and RHETORIC is always extremely optimistic at the top! So they go back to the default "this time its different" mentality, buy the hype and pay the premium on the market with respect to valuation.

On to the data.

All the charts shown in the post are generated from Professor Shiller's data. Here is the relevant excerpt for interpolated and composited data:

This data set consists of monthly stock price, dividends, and earnings data and the consumer price index (to allow conversion to real values), all starting January 1871. The price, dividend, and earnings series are from the same sources as described in Chapter 26 of my earlier book (Market Volatility [Cambridge, MA: MIT Press, 1989]), although now I use monthly data, rather than annual data. Monthly dividend and earnings data are computed from the S&P four-quarter tools for the quarter since 1926, with linear interpolation to monthly figures. Dividend and earnings data before 1926 are from Cowles and associates (Common Stock Indexes, 2nd ed. [Bloomington, Ind.: Principia Press, 1939]), interpolated from annual data. Stock price data are monthly averages of daily closing prices through January 2000, the last month available as this book goes to press. The CPI-U (Consumer Price Index-All Urban Consumers) published by the U.S. Bureau of Labor Statistics begins in 1913; for years before 1913 1 spliced to the CPI Warren and Pearson's price index, by multiplying it by the ratio of the indexes in January 1913. December 1999 and January 2000 values for the CPI-Uare extrapolated. See George F. Warren and Frank A. Pearson, Gold and Prices (New York: John Wiley and Sons, 1935). Data are from their Table 1, pp. 11–14. For the Plots, I have multiplied the inflation-corrected series by a constant so that their value in January 2000 equals their nominal value, i.e., so that all prices are effectively in January 2000 dollars.

Notice the pattern? Stocks become a tremendous value when the P/E ratio approaches the Dividend Yield. Fear of equity performance drives valuations to very favorable ratios. Each time this happens, the market puts on a subsequent tremendous bull run. The market becomes eventually becomes overvalued and then needs to pullback and consolidate while the ratios bottom before the next major bull run can commence

Let's think about why. When times are perceived as good, when investors are (as a herd) optimistic, prices rise and a premium gets placed on growth (P/E goes up and Dividend Yields go down). When times are perceived as bad, investors are pessimistic, prices consolidate or fall and a premium gets placed on safety (P/E goes down and Dividend Yields go up).

And like I am observing above, emotions overshoot in both directions: we get irrational exuberance at the top and abject fear at the bottom.

But why the equality of P/E and Dividend Yield at the bottom (why is this value of about 6-10 P/E and 6-10% dividend yield).

Because this is the ultimate spot for value investors. When the market goes down to a P/E of 6-10, you will have a 100% appreciation on your investment (in terms of earnings) in 6-10 years assuming no earnings growth. That is exceptionally compelling no matter what the investment is. Additionally, a dividend yield of 6-10% means that you will receive cash return on your investment costs that completely pay you back in 10-17 years. Again, this is a ridiculously compelling scenario.

That is what we find at bottoms: absolutely ridiculously compelling investments because the herds emotional state is terrified.

And is that what we found on March 9, 2009? .... NOT EVEN CLOSE.

Earnings were in the toilet but fear was at a peak. So we got a bounced based on oversold technicals and a bearish sentiment extreme. That's all.

The rebuttal (I can just hear it being voiced now): "That is a completely incorrect assessment. The stock market is now based on growth, not dividend yields. This is a result of inflation / monetary policy." (which is the correct assessment on the upward side of the valuation cycle). Or perhaps the rebuttal will be even less well analyzed: "We reached a bottom, the economy is recovering and 666 on the S&P 500 was truly a good value for long term investors".

..... and this explanation is BULLS**T (in this case it is quite literally BS)

Because it assumes "This time it is different". Nothing goes up or down in a straight line. There are secular markets and there are always cyclical countermoves within the secular market. There was a cyclical countermove up (bear market rally) from the bursting of the Tulip Bubble, South Sea Bubble, early stages of the 1929 crash during the Great Depression. The is always some reason to justify why the asset rises despite unfavorable long term valuations while on the way down from a peak. In this case (March 2009 to now) we had massive liquidity injections from the government coupled with favorable currency exchange rates for an inrush of money to place this bounce at the macro level. But both aspects are now changing.

The next chart is using Professor Shiller's Long Term Interest Rate and CPI adjusted P/E and Dividend Yields. Read this for an explanation of what these curves mean.

Why am I showing you this? For the same reason I showed valuations in this post (Sentiment: P/E, BPSPX, VIX and CPC) using both operating and GAAP earnings. Some people argue that GAAP earnings are not representative, so I showed that even in *operating earnings* terms we did not reach any meaningful bottom.

Same deal here. Some smart aleck might argue that the nominal picture is distorted by inflation, even though I have already shown that inflation arguments for P/E are also invalid, because P/E is "inflation neutral" (Prices are inflated and Earnings are inflated, so P divided by E removes inflation effects). But how Dividend Yield, P/E, and the CPI interact is a bit more complicated. So it is worth showing the slightly more nuanced picture.

But the point is, even in Real terms, there was no meaningful Valuation bottom in March when compared against the historical record

So What's that Upshot?

From the point of view of the long term value investor there was no meaningful bottom reached in March 2009 with respect to P/E ratios and Dividend Yields when compared to the bottoms of the last 100 years.

Moreover, if you look at the patterns on the charts above, the correction periods of declining valuations were always short in comparison to the previous bull market. This showed that for the last 67 years (1933-2000) we were in a secular bull market and the bearish moves were all countertrend.

This is yet another reason why I reiterate that we are in a secular bear market. This current valuation and price cycle is on the decline and is already 9 years old, and we did not reach the bottom yet. There will be many more years of this bear market to go until we get utter bullish capitulation and absolutely insane "end of the world" valuations (which I firmly believe WILL **NOT** HAPPEN: Thoughts on the Dow/Gold Ratio)

.... But then again, maybe this time it's "different"

Sunday, December 27, 2009

More Thoughts on the Ending Diagonal Option

On Thursday I was showing that the Ending Diagonal option was still very much alive (And Just to Show You How Annoying the Market is Behaving). The pattern still looks good on both on Futures and Cash (this is not always the case. For example, the Triangle Option is much more clean on the Cash than it is on the Futures). On the E-mini, both trendlines are flatter than they are on the SPX, but both are converging and both do trend up.

The other compelling aspect to this count is the time factor. The 3rd wave of a diagonal or a triangle is typically the longest in duration and the most complex. And so when you see both the Diagonal and Triangle Options side-by-side like I show in my last post (And Just to Show You How Annoying the Market is Behaving), the Diagonal option is showing this trait, whereas the Triangle option is not.

As one last point, the Diagonal option for the SPX fits better with the timing of the counts on the other indices. For example, my count for the Russell (Heartbreaker) shows that we have one more down wave (4) followed by one more up wave (5) for P2. This would fit very nicely with the 4th and 5th waves of an Ending Diagonal on the SPX.

This is another case of many pros and cons to both counts and it is very hard to say which one is my preferred count. Just offering the group my thoughts as I have them.

Friday, December 25, 2009

Merry Christmas and Happy Holidays!

Merry Christmas and Happy Holidays to all!!

Thursday, December 24, 2009

And Just to Show You How Annoying the Market is Behaving

Like I was discussing here Count Choculitis we finally broke out of the trading range and my preferred count was the Triangle B wave. It seemed to best describe the action on the SPX.

.... Yet I was still holding the Ending Diagonal as an alternate count. (I always have 6-10 alternate counts going at one time, ranging from somewhat likely to nutso. I only show my preferred count, because I have to decide which one to trade off of, which forces me to choose a count that is "more likely than the rest" even though I ***never*** put a 100% chance of likelihood on *any* of my counts)

And the current move up and bounce down, is respecting the Ending Diagonal Option pretty nicely.

So for your viewing pleasure, 2 possible counts. The triangle is still my preferred but by a small margin. There is a lot that is compelling about the diagonal option.

Wednesday, December 23, 2009

Crazy Bullish Gold Count

Before I hear the inevitable criticism that my personal stance on gold is coloring my TA of gold (and I have already heard this unfounded criticism repeated .... ad naseum, so if that is what you are thinking then just save it), let me just say that this is a possible count.

I am not advocating it.
I am not saying this is what I am trading.
I am not saying that there are not other counts out there.

I am saying this is a possible count. That's all. It breaks absolutely no rules and is a viable interpretation of the wave structure.

Blah, blah, blah ... doesn't have the right look. Blah, blah, blah ... Gold made a new high while the Dollar didn't make a new low. Blah, blah, blah ... Gold is only 30% over its 1980 peak.

I have heard it all before. Again, I am not saying this is the only possible count.

Daneric for example has a very plausible bearish count for gold: http://danericselliottwaves.blogspot.com/2009/12/gold-update.html. And quite frankly there are many bearish counts out there that are very similar. I am not an EWI subscriber, but EWI is publicly known to be bearish on gold, so I would suspect they have a similar count.

But I am not bearish on gold. I am very bullish on gold for the long term and the intermediate term. I think it will be very volatile but is in the middle of a massive bull market. For my long term take on Gold (fundamentally and technically), see this post: The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure), for my long term take on the Dollar (fundamentally and technically), see Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog.

So you can go to a dozen sites and find a bearish count for gold, or analysis saying that it is at the top of bubble that just bursted. But since I am bullish, I will show you my bullish count.

Again, this is not the only possible count. I acknowledge that preemptively, like I have already done many times ***and like I do with all my analysis***. This is one interpretation and I give you links to the other side (bearish) too. It is up you you to decide which case makes the most sense to you.


Russell, Russell, Russell.

Russell broke this bears heart yesterday: Don't Pull Your Love Out on Me Russell, when it made a higher high invalidating the Russell P2 count. And with the move up today, the Triple Top Scenario is virtually gone.

So assuming my short term count is correct, I spot a few interesting Fib Relationships:

Minute C = 1.62 * Minute A => 648
Minor Y = 1.62 * Minor W => 650
P2 = 0.62 * P1 => 660
Upper trend line (bottom chart) at the end of the year = 660

So I think Russell will be making a run up to 650-660 for the end of the year.

.... Don't worry Russell, I will be waiting for you there :) (smooch)

DXY and ES

Here is an update on my ES and DXY counts. Still look good from yesterday (Late Night Dollar and Evening E-Mini). On the Dollar, I revised the 4 of 5 count. I think that mess yesterday was a very funky (and sneaky) triangle (as triangles are wont to be sneaky). Let's see if they hold up.

MTaA Milestone

Market Thoughts and Analysis just had its 100,000th Unique Visitor!

I know, I know, compared to other established EW and Analysis sites, which probably get this same amount of traffic in a week, this is really small potatoes. More like tiny potatoes. A twinkle in a Daddy Potato's eye?

But I am very grateful that this site is growing and that readers are responding to it so positively. I think the comments are fantastic, and we all benefit from rigorous analysis due to healthy criticism of each others counts by sharp analysts all who have alternate counts to offer when the waves look fuzzy or when they look too clear.

So Thank You to all of MTaA's readers and commentators especially! I look forward to counting waves with you into the New Year!

Merry Christmas and Happy Holidays to All !!!


Tuesday, December 22, 2009

Evening E-Mini

Here is the ES Count this evening. Still meshes with the count of the SPX that I showed this afternoon: Count Choculitis

Don't Pull Your Love Out on Me Russell

Don't pull your love out on me Russell
If you do then I think that maybe
I'll just lay me down and cry for a hundred years
Don't pull your love out on me honey
Take my heart, my soul, my money
But don't leave my shorts drowin' in my tears


Oh, Russell, you are just breaking this bears heart. .... Here is the new count.

..... But if you make a Triple Top, then this bear will be in love with you again. :)

NIKKEi schoen, Darling, NIKKEi schoen

Ahhh, the fusion of Japanese and German. .... binv, you are off the reservation with these bad puns!!

Just wanted to review some of my NIKKEI calls and to check up on them. I have put together several posts discussing the NIKKEI the last several months: A Trip Around the Globe: A Look at a Few International Indices, NIKKel, I Deserve at Least $0.06 For This Analysis last week, If I had a NIKKel for .... Nov 29, where I identified the potential H&S setup, and Long Term Count of NIKKEI back in Sept.

I want to first back to my Nov 29 post (If I had a NIKKel for ....) where I identified the potential H&S setup. Here is the chart from that post:

We did indeed get a bounce off the identified support line, as I discussed in my next update on Dec 7 in this post: NIKKel, I Deserve at Least $0.06 For This Analysis. Here is the chart from that post:

H&S Setup still looked good in this Dec 10 post: A Trip Around the Globe: A Look at a Few International Indices


And that brings us to today. We have a right shoulder forming in approximately the timeline that I discussed several weeks ago. And the latest development is a rising wedge (bearish) forming at the apex of the right shoulder:

This looks like a very good shorting spot to me. The rising wedge will probably extend out just a bit more, but this looks like a low risk / high reward short spot. How do you play it? Don't ask me, I am just making observations on 2-D paper :)

Count Choculitis

Okay, finally back to having a preferred count. It feels good to be out of that range. Kevin had it right all along. And true to form his observations won out (see this conversation from 6 days ago: http://marketthoughtsandanalysis.blogspot.com/2009/12/these-pipes-are-clean.html#comment-25866929. Kevin, you are da man!!! ).

Since the low on Friday, I can count 5 clear waves up, which I count as a 1 of C. And I think this is consistent with what the triangle / Minor B is telling us. Based on the width of this triangle, I get a target of 1135-1140. And so the current 5 wave move is too short (and not long enough in duration) to reach that target and be consistent with a Minor C.

So, as of right now, this is my preferred count

A word of caution: We got a breakout and then a reversal. The bears will call this a bull trap (the real bull trap will be if this thing runs all the way to 1140. That is the short spot I would like to see) as we are reversing hard. However, don't be surprised if this thing pulls back all the way to 1100. That is the price pivot for the whole trading range. Be *very careful* because I think a sharp Minute Wave 2 pullback will look an awful lot like a bear trap. My $0.02.

Break On Through

..... To the Other Side

Trading range on the SPX is finally broken

Notice I say the SPX, because several of the other indicies have already been giving bullish inclinations.

But the point is that the SPX was not confirming those higher highs, and now it is. I think we can safely say that we are in Minor C for the SPX.

My next post will give my preferred count for the SPX.

But the really important point to take away from this post is the fact that all of the indices are moving very decidedly *out-of-sync*. This is a marked difference than the lock-step behavior that was observed during the first 7 months of the rally. Things get really disjointed near tops and bottoms. And since we aren't at a bottom .....

Late Night Dollar

The Dollar is up late watching infomercials and eating Cheetos .... wait that's me.

The Dollar count has been vexing. It keeps putting in impulses. I revised my count from last week this morning, but it messed up the most obvious large 4th wave. But with a higher high tonight, I can put the 4th wave back to where it should be, and the 5th wave counts like an extension. And I think this version of the count channels much more nicely.

Monday, December 21, 2009

HSI Neckline?

See my last HSI post for details: HSI Update

The is an update on the potential H&S setup.

adding SSEC chart for good measure

Jingle Bells, Batman Smells

Wow, silly season really is in full swing. But instead of being wildly bullish, the market is just focusing in on that range and compressing on that pivot line.

So first, here is the overnight action so far. I have an updated Dollar count and another look at the ES. The action is looking mighty triangle-y to me (more in a minute).

So like I was discussing this past week here, Update on Minor Degree Count Options we are range bound, and until we break out, there is no way to know what the count is.

I see 3 main options like I talk about in the post: 1) Ending Diagonal, 2) Expanded Flat, 3) Large Triangle

What is interesting about the action on the futures is that the bottom trendline for the diagonal is now practically horizontal. So I think that option is now much less likely. Based on the current pattern, Kevin's large triangle looks very promising. Everything is just compressing about the 1100 pivot (like in this chart from Friday):

**However** until there is a breakout of this range this could morph into something completely different. Caution is still definitely warranted.

Sunday, December 20, 2009

Do You Smell Something?

.... Yep, it's Financials. Peee-Yeewwwww!!!

I am very vocally bearish on financials for the long term. I think they are the cancer of the US economy. Monetary policy over the last 20 years have allowed for, encouraged in fact, the economy to become financially top heavy. I could go on a rant (and have many times in the past regarding financials) but I will not. I am very long term bearish, and I will leave it at that for the moment.

Here is my P2 count for financials. I think P2 is done for the sector. There is a possibility that the action the last 2 months was an X wave and now working on Z of P2. If this is the case, then I don't think it will make substantially higher highs. In fact I would expect it to make what amounts to a double top.

But there is a difference in being long term bearish and recognizing the possibility for a near term upside move. And I think there is one. Here are the two basic scenarios that Gumbo and I see (we have been discussing this recently)

- (binve scenario): We are in Minor 2 up of Int 1 of P3. Next wave up is a Minute C of 2.

- (Gumbo scenario): We are in the final wave up of Int Z of P2. It will make a slightly high than Oct high

So the way I am playing this: I am waiting for the move within silly season to run its course and will be establishing a long term short position in XLF probably in early January. This will be a "short it and forget it" type position.

Saturday, December 19, 2009

Long Term Trendlines on the SPX

I was asked recently to give my opinion on a chart (20 year chart of the SPX) that had some trendline analysis and conclusions. And the chart was an arithmetic chart ..... yeah.

Let me again state my reasons for Why Arithmetic Stock Charts Are Worthless. 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!!. This is particularly problematic when doing long term trendline analysis, because an arithmetic chart will *NOT* preserve the relationship between price data separated by a large time gap, which as I explain in the link above is exponential in nature.

** There is an exception to this general statement, and it is the crux of AdirondackFund's analysis. He has done a lot of work with Gann, 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, and per my reasoning in my link above, I argue that it is invalid.

Does it mean I am right? No. It just means I have an opinion, but what I do is share that basis for my opinion. Your job is then to read my reasoning, see if it makes sense to you, and then decide if you will use it.

As a point of comparison, I analyzed the same data, the 20 year chart of the SPX, and examined using a log scale. Drew the same major long term trendline connecting the 1990 and 1995 bottoms. And you can see, it paints a very different picture from the bullish scenario:

Friday, December 18, 2009

HSI Update

I have written several posts that include charts of the HSI, it is an index I follow regularly. My last dedicated post on the HSI was this one: HSI...I...I...I am appalled.

The reason why I watch the Hang Seng? Because it is very heavy China stocks and it is very heavy financials. Both China and Financials were the benefactors of early speculative money during the crisis, and I have a feeling that money will be leaving these two first as well.

I am somewhat agnostic on China. There is a lack of transparency. By many accounts there are many conflicting bullish and bearish developments. But I am no China expert. hhasia is and she is very bullish on China.

However, I am **extremely** bearish on financials. And even if the China side of the equation is still strong, the financials side of the equation will bode trouble for the HSI.

Here are my charts, and they are not bullish. My $0.02.

GLD Chart

Current GLD chart (for intraday proxy). Updated from this post Gold Charts, US Dollar Charts

Update on Minor Degree Count Options

This is an update of the charts and observations I made yesterday in this post: I'll Bring Home the Turkey If You Bring Home the Bacon

Here is the chart you *should* be trading

i.e. you should *not* be trading this mess with any substantial portion of your funds. I am sure some of you are with a small portion of your funds, and if you are not losing your shirt or doing slightly better than breaking even, congrats. If you are making big bets because you think you "figured this wave out" .... good luck to you.

So even though I have no preferred count at this point, and will not until we break out of this range, here is an update on the 3 most likely counts in my mind.

No favorites, just 3 possibilities out of a multitude of others.

But why am I focused on these as opposed to a count that shows either we already topped (ended P2) or a wildly bullish count?

Because the Dollar has broken trend. It is in rally mode and will rally for the next 4-6 months (past that I differ substantially with the long term Dollar bulls). But this is an important trend change. I find it very difficult to believe that the market will be able to maintain its rally mode in the face of this. However nothing goes up and down in a straight line, and the current rally in the dollar needs a correction. It is working on a 1 and needs a 2 pullback. The stock market will likely rally, albeit anemically, during the next short Dollar correction. But beyond that is wave 3 (Minor Degree) up for the Dollar and the market will quite likely react very negatively to this. And we must not forget the end of year rally. Erik has a well-thought out post for the reason behind the traditional December rally: USD trend change: When will it start dragging down the market?.

So that is why I am focused on this count variant: Either current consolidation or perhaps a pullback followed by one more technically weak higher high for the broad US equity market.