Update on Long Term Projection (01/19/13)

This Long Term Update will take a slightly different flavor than the last one (Update on Long Term Projection (08/17/12)) since I will be adjusting my count from the 2011 correction based on how the waves have been unfolding. I will show my rationale for that adjustment. But first I want to set the stage for the reason why I still think we are in the middle of this cyclical bull market, and not near the end of it.

Market Internals

The are a large number of market internals that still saying very strongly that this bull market is intact. I have discussed all of these several times, please see Long Term Projection, Macro, and an Analysis Retrospective for a detailed discussion and links to previous analysis and charts going back to a couple of years now.

Corporate Profit Margins still have not peaked and are making new recovery highs alongside the market. And as I have pointed out before, even if they peak this quarter the stock market will likely not be at a peak. This divergence takes several quarters/years to play out as the profit margins peak and the fundamentals start deteriorating long before the analyst community is able to confirm it.

The VIX continues to make new recovery lows as the market makes new recovery highs. If a peak in the market were to happen in conjunction with a VIX recovery low, then it would be completely counter to the 2000 and 2007 peaks which saw very pronounced VIX divergences for over a year.

The NYSE Advance/Decline Line as well as the NYSE New High/New Low Line is still making new highs alongside the NYSE Composite. Both of these displayed significant divergence for several months at the 2007 top. Now there is an issue that I have brought up before using the NYSE internals (see: NYSE Common Stock Only Indicators) and an analysis with them is less compelling due to the proliferation of fixed instrument / bond funds on the NYSE thus making less of a solid proxy for the stock market. But I still think it is still more useful than not useful.

When looking at the strength of these internal measures (fundamental, volatility, and technical) I continue to be convinced that we are still in the middle of this cyclical bull market and not near the top of it.

Wave Interpretation

In November/December I was thinking that we were in the middle of an Intermediate term correction. By mid-December it was quite obvious that was the wrong call and all we had experienced was a Minor Degree pullback on no divergence. You can see the count from my last Update on Long Term Projection (08/17/12) and why I was thinking that, which was obviously the incorrect count.

So I have been thinking a lot about the long count over the last few weeks. I was waiting for a new recovery high to cinch my theory and that has now been confirmed. The crux is that the wave behavior since the major 2011 correction is markedly different in character than the wave behavior before the 2011 correction. I outline the differences on the next chart:

I had been previously thinking that lack of Daily divergence at the early 2012 pullback meant that it was likely only a Minor Degree correction. Based on seeing three confirmed and completed pullbacks since the major 2011 correction and we can now compare sizes and durations, I am no longer of that opinion. I think the early 2012 pullback was an Intermediate correction, and that the form is different than the pre-2011 pullbacks.

The depth and severity of the mid-2011 correction and the fact that it did not end the cyclical bull market has changed the outlook of market participants. I think they are much more convinced of the viability of this cyclical bull and are more willing to 'buy the dip' on any sharp pullback (whereas prior to 2011, people were nervous and would wait for 'one more leg down' before buying the dip). This is making for corrections with spike bottoms on no divergence.

There is a loose analogy with the 2002-2007 cyclical bull market where the corrections before 2005 have a somewhat different flavor than the corrections after 2005. It is not as pronounced as what we are seeing now, but I think the precedent is there.

So with that observation made regarding the wave behavior and the observations made in the first section that show internal measures still confirming that the cyclical bull is intact, here is my updated long term projection.

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

-- Apr 2012: Large macro, fundamental and sentiment update. In depth post and a recommended read (many links to previous analysis) - Long Term Projection, Macro, and an Analysis Retrospective

-- Aug 2012: Projection calling for a late 2012 correction, however the degree of the pullback was misidentified - Update on Long Term Projection (08/17/12)

Primary Wave Projection

As noted above in the Wave Interpretation section, the early 2012 pullback is now assumed to be an Intermediate Degree correction, and the flavor of the wave behavior after mid-2011 is very different to the wave behavior before mid-2011.

Secular Bear Market Projection / Long Term Count

For the SPX:

And NASDAQ Composite for good measure:

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. I think the next pullback would fit timing wise with the next 4-year cycle bottom (which as I show on my chart can simply be a mid-range correction).

Dec 15

I think that the rally since the mid-Novemeber low is now over. Of course, take this with a grain of salt because I thought the Dec 3 peak was the top of the rally, which it obviously wasn't. My 60-min system issued a sell on Dec 4, which got reversed and a buy was issued on Dec 10, and the system turned back around and is now on a sell again since Dec 13.

But a slightly more compelling setup has occurred for a turning point with the clear bearish reversal candle posted last week (which *must* be confirmed next week), and the close back at / slightly below the 50 DMA.

My take at any rate.

Nov 16

I still think we are in the middle of this Intermediate Term correction and not near the end of it. Daily chart is still suggesting more downside if I am looking for the correct setup. The 60-minute system issued a buy this afternoon and we are very oversold for the short term. If the market is trying to stage a bounce here, it might try to retest the 200 DMA before continuing down:

Here is my current best estimate for how this wave is playing out, for anybody that cares:

Nov 14

This move is starting to waterfall down as the 200DMA has been lost. This is looking extremely likely now that we are in the middle of an Intermediate Degree correction. As I have said previously, I expect the next intermediate degree pullback to be similar to the Apr-July 2010 pullback and not the May-Oct 2011 pullback.

I have updated my PPO chart with an overlay of the Apr-July 2010 pullback depth applied to the recent peak. I have also layed out how I think this may manifest, but more importantly the signals that I will be looking for on both the fast and slow Daily PPO indicators:

Nov 10

Here is another look at an indicator that is saying that the 'potential' for an Intermediate Degree pullback has been confirmed. I often look at PPO movements (see this post for why PPO is a superior indicator to MACD) movements on a couple of different timeframes. I like 14,30,10 as a 'fast' PPO indicator (I think the default 12,26,9 is too fast) for finding bottoms and I like 34,89,21 as a 'slow' PPO indicator for finding tops. Looking for confirmed divergences often givens you insight as to what is happening. And the wave up since the 2011 has now formed such a divergence on the slow PPO on the Daily chart.

Combined with the recent 60-min, Daily and now Weekly sell signals from my Trend System, I think the market is at risk for an Intermediate Degree correction. The more I study the charts this weekend, the more realistic I think that possibility is becoming.

Oct 6

The recent high and pullback has set the stage for some meaningful divergences on the Daily chart. Does this mean we are at a top now? NO. Does it mean we are *near* a top? MAYBE. These divergences typically take a few months to manifest and play out, and my observation is that we had a significant peak from which those divergences can START in September.

My thoughts right now are that we have a couple more months of the current rally left before a meaningful correction (Minor degree wave or higher). This also works with seasonality: October is typically one of the best months for the stock market (http://pragcap.com/october-the-jinx-month), I have serious doubts there will be any major pullback before the election, and then the market will be set up for a potential Santa Rally.

Of course none of that could happen, but if we are looking at odds and the lack of divergences in the current wave from a Daily standpoint, I say the strength still rests with the bulls right now.

Sep 19

I occasionally go back and look at my monthly charts and today I was looking at my SPX monthly chart. Here it is for any one that is interested. I still don't think we have seen 'the top' / end of this cyclical bull market. Still no divergence on the monthly MFI for the last series of peaks over the past year. Read this chart below in conjunction with my most recent long term projection (with lots of links to previous long term projections): Update on Long Term Projection (08/17/12)

Sep 16

Here is a look at some indicators on my Daily chart as another reason why I think we have more upside for weeks/months before we have a meaningful correction.

May 11

A look at the weekly chart:

May 9

We got a sub-cycle bottom signal today on divergence with my 60-minute system: https://twitter.com/#!/binve01/status/200275729206878208.

There is a lot about the short term that looks compelling from a pullback perspective. Also the 'analogy' chart that was discussed on May 2 has a more complete look to it. Also notice the lower orange PPO indicator. It did not go into divergence at the top of the wave like it did at the 2010 and 2011 tops.


The next section is my current EW count. Feel free to skip this section if you are not interested.

First is the count of the most recent correction. And I see two sharp 7 waves down with a complicated/messy 3 wave up in the middle:


Zooming out is the count up from the Oct low which was discussed Apr 10 (and no, it's not an impulse):

Count since the October low where the waves down to the ~Subminuette/Micro degrees are identified.


Now, I am sure I will get comments about my counts. That these W-X-Y's don't follow the EW orthodoxy (to which I say the orthodoxy is completely incorrect: http://marketthoughtsandanalysis.blogspot.com/2011/08/regarding-tops-and-sloppy-misleading-ew.html#comment-276329829). Or that all these W-X-Y's are 'unhelpful' and complicating what could be counted as simpler wave forms.

I disagree on both counts. The fact is that the structure of this wave at nearly all degrees of trend has been distinctly three-ish ever since the March 2009 low. And for anyone who is looking at the waves objectively, we can see threes even in the move since the October 2011 low. You really don't get impulsive waves until you drill down to the micro/submicro degree. It is all right there, plain as day:


The fact that I don't suffer from the affliction where I try to shove every sharp wave into an 'impulse box' means that I am seeing the waveforms more objectively than the greater EW community. It is precisely this view that allowed me to call the top last May when the rest of the EW community was looking for another wave up to finish the 'impulse': Regarding Tops and Sloppy / Misleading EW Practices.

Zooming out again is my 'near-term' daily chart.


And here is my 'longer-term' daily chart.

May 2

Here is a chart looking at the structure of the last two major bull waves up. I don't think there is one-to-one correspondence, but I do think there are some analogous features.


I do think we have another wave up to make a clear higher high. Personally I don't think we are at Dec 2010, but more like Mar 2011 from an analogy standpoint. This theory would tend to fit with what my Daily Trend System is telling me. It is expecting a higher high, but as things stand now the next peak will likely happen on a divergence between price and my main indicator. This is something I am expecting as 18 out of 20 past Daily Cycles with a similar configuration have done.

So I tend to think we are getting near the top of this wave, but we aren't there yet. Also, as my previous analysis shows, I still don't think this wave will be 'the' top: Long Term Projection, Macro, and an Analysis Retrospective

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.

Mar 23

We have a potential correction in progress. This was the first real red week since the breakout. If this is the start of a decent correction, here are two views of how they could play out.

1) The sideways correction.

Relieve the overbought conditions and just correct sideways in time with no severe price retracement, similar to the 2010 mid-rally correction.


2) A deeper price retrace.

I still think this cup-and-handle setup is a good potential also. Nice support at ~1300.


But like I have been saying the last several months and in the last several posts in particular, I still think the October low marked an important low and at that there are a number of reasons why I think looking for a major top here is incorrect. I believe this correction will be a dip that you want to buy in the longer term sense, that this cyclical bull market is still not over.

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


Macro

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.

Moving Average 'Price Stretching' Update

Here is an update to my original 'Price Stretching' study: Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'. Think of this as a companion piece to my previous post: Yet another reason why I don't think we saw 'the' top (3) and BPSPX Update

There is a lot of background information on this study, so please read the original post first.

Between the original post and this post (Secular Bear Market Projection in Historical Context) you can see how I arrived at my comparisons / prototypes / projections.

The 2000-20xx Bear Market updated Price Stretching chart:

BPSPX Update

Here is an update to my original BPSPX study: The BPSPX and the Secular Bear Count. Think of this as a companion piece to my previous post: Yet another reason why I don't think we saw 'the' top (3)

The main points are:

• Bull markets do not end on strong technicals, they end on weak technicals. We always look for divergences in the weekly/monthly MACD (but should be using PPO instead), weekly/monthly RSI, the Advance/Decline Line, New Highs/New Lows, etc
• Why would we expect the BPSPX (Bullish percentage of SPX stocks) to also end on a peak? The answer is: we shouldn't. And the May 2010 peak registered the highest BPSPX reading ever. This is yet *another* reason why I don't think the May peak was the 'top'
• As pointed out in my previous post, it makes more sense to think of bull markets ending on 'tiredness' / 'going out with a whimper'. Where price makes a higher high but the internals do not. We should not only see divergence on the CPCE and VIX but I contend on the BPSPX as well

Why Using the MACD for Long Term Trend Analysis is Worthless

Again, apologies ahead of time for titling the post so stridently, but I wanted it to capture people's attention, in the same way as I wrote Why Arithmetic Stock Charts Are Worthless. And you will see in this post the exact same reasons exist for this argument as does the logarithmic vs. arithmetic price scale argument.

First, you have to read this post for all of the necessary background (Why Arithmetic Stock Charts Are Worthless). If you don't read that post then don't bother reading this post. I will do a quick summary as to why this difference is important, but I will not rehash everything.

I fully admit that I have been guilty of the sin of using the MACD for long term trend analysis. But I want to show you why I have abandoned it (and replaced it with a more appropriate indicator) for long term analysis.

First consider what the Moving Average Convergence-Divergence (MACD) is and how it is calculated (from Stockcharts)

Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of MACD is plotted with the indicator to act as a signal line and identify turns. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

As such, the output from the MACD Indicator (both the MACD and the Histogram) is in terms of points.

Consider the following statement:

"The Dow moved 14 points!"

Is that a useful statement? No, it has absolutely no meaning because it has no context.

If the 14 point move happened when the Dow was at 100 (in 1928), then it was a 14% move (pretty significant). If the 14 point move happened when the Dow as at 14000 (in 2007), then it was a 0.1% move (pretty insignificant).

The absolute magnitude of moves (point moves) in the stock market are meaningless values. They are only meaningful when they are related to some reference value (converted into percentage moves).

Which as I said before: ALL GAINS AND LOSSES IN THE STOCK MARKET ARE EXPONENTIAL!! NOT ARITHMETIC!!.

So does that mean we should scrap the MACD altogether?

NO!

The MACD is an extremely useful trend following and momentum indicator, and is very useful in finding momentum divergences for short term moves (where the difference in price over the range of comparison is small).

The problem happens is when one uses the MACD to find divergences in moves where the difference in price over the range of comparison is LARGE. Then the same exponential issue shows up. Fortunately there is another indicator that serves the exact same function as the MACD, can still find momentum and divergences, has the same EMA input, but is instead expressed in percentage terms.

It is the Percentage Price Oscillator (PPO), (from Stockcharts)

While MACD measures the absolute difference between two moving averages, PPO makes this a relative value by dividing difference by the slower moving average (26-day EMA). PPO is simply the MACD value divided by the longer moving average. The result is multiplied by 100 to move the decimal place two spots.

To illustrate why this is a big deal, and why using the MACD instead of the PPO to find divergence in long term trends (where there is a large price change between the two comparison periods) is incorrect, see this example chart:



As another example of looking at indicator behavior in percentage terms, see this long term study post of mine: First Derivative of the S&P 500, Long Term Study

Conclusion

All moves in the stock market are exponential/logarithmic, not arithmetic. Which means that not only do we need to look at price scales in logarithmic terms (so that we can do percentage comparisons not point comparisons), but also make sure our indicators also reflect moves expressed in percentage terms. This is not as critical when the difference in price between the two comparison points is small, but is absolutely critical when the difference in price between the two comparison points is large.

So far...

As nice and impulsive down as the 5 minute chart looks so far ... it is still a 'blip' on the longer term charts (like the daily chart below).

It could be the start of something, and then it might not be. We are still trading well above major moving averages. There are a couple of support levels below and then the 50 day MA. If this will be a decent correction, we should take those out within the next few days.

However, even though the SPX (and by definition SPY) is still looking like everything 'could' be gumdrops and lollipops for the bulls, the internal mix of the market is not so good. My trend system (which looks at SPX [long term], SPY [short term / intraday], IWM, and the 'X' sector ETFs) issued it's first conflicting signal set (at least one long and one short signal) in months (it has been long or neutral for all the sector ETFs since September). That is another clue that goes into the 'topping process' pile.

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 :)

Divs

Still a pronounced divergence happening here.