So … this precipitous drop got me interested in the market again. I’m still 100% cash, so I’ve only been monitoring in terms of what the economy is doing. But, I’m pretty confident in this post, so I may just start trading the general market next week. I’ll let you know if I get in, and what happens.
First, let me start with a picture, then I’ll explain it.
This is a weekly picture of the Dow, annotated with Elliot Wave mark-ups. As a refresher, since I haven’t posted in so long, Elliot Waves generally travel Up in 5 waves and Down in 3 waves, with Up being represented by numbers (12345), and Down represented by letters (ABC). The basic theory behind this is that the entire Universe is ruled by these types of efficient fractal type ratios, so there’s no reason why our own societal behavior shouldn’t follow the same rules. It’s far more complex than this, but I won’t go into that here, as I’ve posted plenty of links to books on the subject in the past.
On to the chart: First, don’t panic. I really don’t think we’re going to go into a deflationary spiral depression. I’ve also looked at the Nasdaq and the S&P, and they all seem to be showing that we entered what is a Wave 4 of a rather short-term sideways correction, not a huge downward Wave e of the very large abc correctional pattern that we began in 2000. In light blue on the chart, I’ve shown where I expect the market to go, short and long term. Short term, I expect the market to drop precipitously to around 15225 (Green Arrow), with maybe a relief rally on Monday or early next week, rather then the initial 14,400 I posted yesterday (which was a very quick back-of-napkin estimate). From there, we’ll likely go sideways along something like the pattern I’m showing through Mid 2017. From there, we’ll be off to the races through 2022/3 to around Dow 22,000.
Why do I think this? Because these patterns show up time and time and time again at different levels of Degree. If you stare at charts long enough, like I have, you begin to recognize the beginning of each of these different types of patterns. What we’re living through longer term, right now, looks like a 13 year bullish wave beginning with the ’09 bottom. Shorter term, it looks like we’re beginning a pattern called an “Expanding Flat” for Wave 4 which will end when it hits the bottom channel, labeled with the number 4.
Now, if the market drops though 15,225, we have a major problem, and this analysis is likely very wrong. But I don’t expect that … it’s likely that the China panic will continue for a bit, but the central banks will step in and start printing more money to make sure that we don’t enter said spiral. There is no limit to how much money they can print so long as deflation is the dominate force, which it clearly is right now. This Wave 4 correction likely won’t even lead to a recession, as it’s just not at a Degree high enough to ’cause’ one as in ’01 or ’08. A China slowdown might cause our economy to slow a bit, but probably not too much … I think we (primarily Silicon Valley and the Fed) will lead the world out of this very long period of uncertainty. All bets are off in 2022/3.
I still don’t think there’s ANY reason to have any money in equities right now … the risk is still there that we’ll drop through 15,225 to some god-awful lows and best case we’re probably just going to sideways for a couple years.
It’ll be interesting to see if I’m right.
Overall, the chart patterns look ominous. Absolutely no reason to be in equities right now. My best guess is that the Nasdaq will drop to around 3,900 before bottoming, and it will likely be a sharp drop. Dow somewhere around 14,400. Let’s see if I’m right …
The market is back to about where I said to get out … we’re not quite out of this pattern, and the odds of a precipitous drop are higher than normal, but are far less than a couple of weeks ago. If we go above $17,500 on the Dow, I think we’ll go quite a bit higher for some time …
While I have no positions currently (even in my 401K), and haven’t for some time, I have still been watching the market, if just not as closely as when I’m active. At the moment, I see no reason to be in the market, even for the longest term investors. You can simply go to cash, and when the risk of a serious drop diminishes, you can buy back in. I’m not suggesting here that the market definitely WILL drop precipitously, it’s just that, right now, the way it’s behaving, the risk is higher than normal that it will. There’s an old adage in poker, “There’s always another hand.” As I’ve done in the past, and documented here (but this time without the extreme fear I was experiencing prior to that post), I can tell you when to get back in.
By the way, this is not a ‘panic’ recommendation, it’s a strategic method to keep recently made gains. I haven’t posted for a long time because I wasn’t active, and there was no reason to post … the market hit my target almost to the day (I’ll show charts to that effect in a future post) so there was little danger for anyone with market investments. I thought I owed y’all at least a heads-up on my thinking.
“Keep stops tight on your stocks as when this market pulls back even 1-2%, the better names often sell off much harder, giving back in one or two days what it took one or two weeks to achieve. QE forgives the general averages while higher octane stocks can get pummeled.” — MLR, Premarket Pulse 11/25/13, virtueofselfishinvesting.com (a trading newsletter I follow)
It’s been a while since I’ve posted, so a little pre-amble / refresher: I stopped trading because I wasn’t doing very well relative to the market (I was flat, market up nicely), and I realized something was wrong. I had studied this too much to not be be able to get a better return than just “holding and forgetting”. And since I cannot and will not buy and hold — an extremely dangerous investment strategy — I had no alternative but to just take a break and re-evaluate. A lot of other famous traders have been doing quite poorly in this market, all with a somewhat similar system based in trend following and / or technical analysis of leading growth stocks. And they’re the ones I had latched on to as the best strategy (they’re all quite rich) that best fit my trading / investing mentality. Unfortunately, in an environment where the Fed is pumping bazillions (sic) into the economy to provide us with “nose above the water” growth, this strategy does not work. This is not a ‘normal’ economy, and the market reflects this.
I believe that we are at the dawn of a new historical era…either on the cusp of a massive crash, or a massively robust decades-to-centuries long…what shall I call this…”Savvy Economy.” (If this happens and the name sticks, remember you heard it here first. ) I give the edge to the latter, and I’ll make the case for this in a subsequent post.
Here’s a very good article on the limitation of QE that I found by Googling “Limitations of QE” written a year ago. He’s a Brit, and there’s very little information on who he is or what his credentials are. Having said that, his article made a lot of sense to me — it was good analysis. Paraphrasing: QE can work in the short term to re-ignite an economy, but eventually it will cause hyper-inflation unless the government eventually reduces its structural deficit to be able to handle repatriating the bonds it’s been purchasing during a deflationary environment that we *would have* been experiencing without QE. At the end of the article, he showed his bias by stating that the U.S. economy would implode, by his best estimate by 2020, and that our deficits are unfixable because they’re baked into our political system via the structural checks and balances that we have via our separation-of-powers-based government. But since his article was written, via a clearly horrible process called sequestration and a whole lot of arguing over higher taxes, we have done a pretty good job of fixing our short term deficit problem, down to 2.1% of GDP, or one-fifth of what it was at the peak of the recession. Unfortunately, the deficit will begin to rise again starting in 2016, due to aging baby boomers drawing their entitlements. (From a NY Time article.) Net, net, the Brit is a doom-and-gloomer, that, so far, has once again been proven wrong in predicting the future.
To my Opining: The biggest problem this country faces, one that threatens its very existence via a potentially imploding economy, is our debt and deficit. By hook or crook, we found a short term buy-some-time solution. What remains is a long term unsustainable taxes-too-low / too-many-entitlements problem. As I’ve written before, I couldn’t care less which side you choose to err on to fix this problem, it just needs to be fixed. And if it is, I think you’ll see a HUGE confidence boost in the economy. Instead, we get supreme stupidity from both sides of the aisle. And I will take a couple shots here: The Republicans have not yet faced the reality that the country has become more liberal, and act like children every time they get a chance to bring up this subject. (By tying Obamacare to the argument this time around, I think the Republicans made a huge tactical political mistake…they’re gonna lose this battle, and are in danger of putting Pelosi back in the Speakership in 2014). But, I hear very little to nothing from Obama on this unless the House Republicans are throwing said temper tantrum. Obama is clearly not leading on this subject, and because he is the President, HE owns this, as do the Democrats.
So what do I believe will happen? I believe in the USA. I believe in its institutions, and I believe that the system will eventually fix this problem and that QE combined with lowering our structural deficits will get us out of this mess. Whether that means that the Republicans are booted out of the House in 2014 and the Democrats, in full power, finally face the reality that even with massive tax increases on the rich that the entitlement programs are unsustainable, that they’ll fix the problem? I don’t know. I just think it will get fixed…like Warren Buffet said the other day, “We’ll go to the very edge of complete idiocy, but we won’t go over it.”
Below is a weekly chart of the Dow. Look how beautifully it’s cornering itself into the intersection of the red and yellow lines, which were drawn months ago. Just two days ago I almost wrote a post stating that the recent 2 day rally would be followed by at least a few down days, into the yellow line. This was BEFORE the Syria news came out. (I only didn’t write it because I’ve just been too busy.) Right now, I suspect that the market will continue to corner itself until it breaks into the clear above the Big Red Line. I give this a 70% chance. If it doesn’t, and it falls below, watch out. The market could tumble precipitously. But, in a way, this is good news. Months and months ago, I was predicting another major crash as soon as the charts hit this latest line, thinking that we had another wave to get through in this multi-decade sideways correction. I was hoping that the flash point for the crash would be a war panic, similar to the panic that ensued during the gulf war, and not some financial calamity. (An aside: None of my guesses were Syria — that I recall. But still, Elliot Waves predicted something like this months ago?! So much for voodoo science.) Why is this good? Because I believe that what the Fed is doing by printing money to fight deflation will separate our very negative current social mood from balance sheet bankruptcies. Which generally run hand-in-hand, causing massive unemployment as in the Great Depression. Net, net, I believe that we are truly learning how to smooth out our economy, and that we’ll never have to go through another Great Depression, as all the doom and gloomers are still predicting. I believe that we learn as a society. I can see this in the charts…unfortunately, most Ellioticians are true doom and gloomers…it’s actually hard for me to read their analysis…it just depresses me. So, if a war panic causes a major stock market slide, it most likely means that we’ve avoided financial calamity, and that we’ll quash a few more crazy dictators along the way for the next decade or so, and we’ll just go along with our happy lives in the good ol’ US of A — without a major impact to our relatively very wealthy lifestyles.
I haven’t posted for a while because nothing has really happened. The Dow dropped a bit and then came right back up to the big red line from my last post. And stayed there. And then today I read this: an article about Advance Decline (A/D) lines and how they can help to predict long term tops. Sigh… (The author, Kevin Marder, writes one of the newsletters I read.) His article is titled the same as mine, but without the question mark. Again, sigh…
Combine this with my Big-Red-line-different-type-of-technical-analysis and this might just be a big ol’ top. And I thought the economy was supposed to be getting better. Now, he does note in his article that that his A/D trigger occurred in ’98, just before the big runup to 2000, so it’s possible that the market will break through the red line and then begin a new pattern, outside of the Big-Red-Line pattern. It’s also possible that there’s a really major trend line flowing underneath the pattern we’re currently in, which would mean that we might not crash to Dow 6000 if we were to top right now.
My best guess…stocks are not really overvalued at the moment like they were massively in 2007. With interest rates as low as they are, one could almost argue they’re undervalued. So we’re not really in a bubble…I think people are pretty wary of our last two bubbles so PE ratios aren’t inflating like mad. I also don’t think that we’re going to return to boom times anytime soon, because our demographics simply won’t allow for it (see previous posts). The Fed is fighting deflation with everything they’ve got…so instead of a massive depression, we got a major recession…and now I think we’re likely to economically just muddle along for some time with, perhaps, a medium depth crash somewhere in the near future.
I’m 100% cash at the moment…and frankly I’ve done very poorly this year relative to the market as a whole. I’ve been re-evaluating my strategy (read: sucking on my thumb) and have stepped away for a bit to attempt to understand why.
The next Big Red Line is here…this time on the Dow, not the S&P. This is a multi-generational tipping point for the market. And it still amazes me just how well the market hews to these lines. There is nothing fundamental that I see that would be likely to take us down precipitously, and a service I follow just moved back to a buy signal, so it looks like the market will break through this line shortly. However, it’s also possible that the market might stay sideways for some time to come as it works through this. For reference, below please find a monthly Dow chart, and then I zoom into the Daily. If it breaks through the top big red line (and stays there), it’s likely that we’re going to have a multi-decade bull market. The implications of this possibility are enormous, as it will “prove” (so long as you believe in this type of voodoo analysis) the doomsayers completely wrong, and Keynesianism completely right. I’ve long argued that the Fed is doing the right thing here…and if the politicians will finally settle down and fix our longer term structural problems, I think we’ll be just fine. As always, I could be wrong. Time will tell.
TREX, YY, NSM, OCN, FLT, URI, EOG, FOSL
An interesting side note: I do not look at fundamentals as I let others services filter that for me as I simply do not have the time. Generally, these are high growth stocks with strong fundamentals that institutional investors have shown a strong proclivity to be purchasing. I then further filter based on simply looking at each chart, with a “buy high, sell higher” mentality. So, it’s always interesting to see the industries I’ve chosen…after I’ve purchased. In this case…
Cosntruction, Internet, Mortgage, Financial Tech, Construction, Oil & Gas, High end consumer
Diversified…but not on purpose. I think diversification is a fool’s game. If the market’s going down, the whole thing is going down…