Planet Yelnick

Trendlines and Timing Point to a January Top

The seasonal pattern has a general rise in stocks from November to May, and we are seeing the market so far conform to that pattern. Usually within it is a February correction, leading to a number of January Tops over the past thirty years.

Sometimes that top marks a major reversal, as we saw in 2009 and 2000, but usually a month-long minor correction. Prechter has been predicting a major top now for the past two years, and a number of technicians have centered on a Jan 24 top prediction.

Now, often these timing predictions when they work mark a change of trend, but it is often hard to predict in advance which way. The market is in an uptrend right now, and might continue as such into next week, when this turn window occurs. This suggests a reversal down, conforming with the seasonal pattern. It still might be a minor correction, however. 

EWI has released through Club EWI a series of charts for the public, which add an additional factor, the approach of the market from below of a major trendline going back to 1932. As you can see from the chart above, the Dow in the late '90s crested the upper trendline, which previously marked tops all the way since the 1930s, and stayed above until 2008. The drop in 2002 bounced from above off the trendline, indicating continuation of the uptrend.

Since the reversal back up in 2009, the market has moved in 3 waves (a corrective pattern) to touch the bottom of the upper trendline. Failure to break through for more than a short time (a "false break") is bearish, indicting a fall down towards the lower trendline. Breaking back above and staying there is very bullish.

This suggests the January Top could be a major one, but step back and consider the broader picture. At trendline tests, a "jitter" or series of tests is common, and we might see a triple top or triple test over the next four to seven months. A false break is tested over the time frame of the pattern, and this one goes back decades, so a period which might seem longish to us (seven months) is but a blip in the broader time scale.

Hence it would not be surprising to see a test and a drop back - the February correction - followed by another test which might stay above the trendline for months - the typical bullish period of March to May at the end of the seasonal patern. If I can paint a scenario, we would then fall back in the summer and test one more time in late summer - the common August High before a serious Fall correction.  

Santa Rally in the Nick of Time

We didn't see a rally from the 2d week of December on, when it often arrives and shows strength. Instead, we have started the Classic Santa Rally, which comes in the last five trading sessions of the year and reflects the common rise on light trading during holiday periods. What to look for:

1. General rise on light volume into first two days of Jan (to Jan 4)
2. January Barometer over first five days - if up into Jan 9 it is bullish
3. December Low Indicator - very bearish for year if we break the Dec low (SP1205)

Last year the January Barometer signaled a strong year, and right now the S&P is barely up - and only because of the Santa clause rally starting yesterday!  So don't take this indicators too seriously.

A lot of economic indicators are pointing up. Some should be taken with a grain of salt, like housing (which just got the last four years revised downwards, making recent trends look more positive), but some are interesting. The shale oil surge has changed the dynamic of indicators ike rail traffic, since we are bordering on a net exporting of energy, especially due to LNG. Rail cars shows an increase which has been used to show continued purchasing interest, but in this case may instead be indicating exports.   

It also has meant a drop in gas prices, which acts like a tax cut. Even though Q3 GDP was downgraded in its third revision, Q4 is expected to report out higher than expected, giving a spur to stocks in January. When I scan the wave world, it is generally bearish (no surprise), so a warning that we might see a stronger than expected January, have the traditional correction into February, then fly into April or May before the bad economic news catches up with a short-term spur of lower gas prices.  

Worst Thanksgiving Week Since 1932

I have been quiet on this site for the past half year, focusing on venture capital not the stock market, but have received a number of requests for a quick market update. We should be entering the seasonal strong period (Nov to May), but instead have suffered the worst Thanksgiving week since the bottom of the Great Depression in 1932. We should be expecting a Santa Rally, which typically begins in earnest around the second week of December, but instead the doom & gloom crowd has suggested that money managers will stay home this holiday season, Grinches all.  

The comparisons to 1932 seem particularly telling. The market since 2008 has seemed to replicate other great crashes pretty closely - the best fit being 1907 - and has some parallels to the 1930s, especially if this time it is seen as unfolding at about 1/3 the speed. Specifically, what started as a pretty bad recession seemed to have turned around in 1930, but a sovereign debt crisis out of Europe in 1931 spread like a contagion to the rest of the world, and pulled the US down. In our case, the equivalent to the bounce of 1930 unfolded over three years, 2009-11, and now seems to have run head-on into another sovereign debt crisis out of Europe. If history repeats at 1/3 the speed, we head down, this time in a sickening slide over the next 4 - 5 years, not a dramatic fall in just the 18 months of 1931 to summer 1932.  

The pattern that unfolded in 1931 was the sovereign contagion led to capital flight from country to country. Hoover in his memoirs likened it to cannons moving back & forth across a ship on a tossing sea in a tempest (a quote you all have probably seen). Right now a run on the European banks is in process, the commodity currencies like the AUD have fallen hard, and Chinese currency outside of China seems to have dried up as stories emerge of Chinese oligarchs cashing out and disappearing. Back in the 1930s, capital flight led the wealthy to go into tangible assets like gold - transportable across borders as it were to escape currency controls. We may be seeing that in China, although the data is sparse, anecdotal and likely exaggerated. As capital sloshed like loose cannons in the 1930s, safe harbors skyrocketed then fell; recently we saw the Swiss Franc skyrocket until the government curbed its enthusiasm. Eventually money went into cash or mattresses.

This was all very dramatic, and given a slow-motion rotation this time, should unfold more as a surreal process of "this cannot be happening." The slowness gives time for the powers-that-be to find solutions, such as Eurobonds done right, but so far they have failed to rise to the historic challenge. 

The markers of the capital-flight stage will be clear:

1. The TNX (the US ten-year Treasury) yield should fall to remarkably low rates, at least below 1.4%. (Near the ed of the Great Depression, it got below 1%.) 
2. The interbank lending rates should skyrocket; watch the LIBOR

Looking at the near term, the big issue is whether this will simply spiral out of control or will we muddle through and kick the can farther down the road.

From a Fractal Finance point of view, this chart should give us pause.  

Wave practitioners have been trying to count the waves since the big drop last summer. In Fractal Finance, the process is simpler. The Fractal view is that markets normally are in trading ranges - corrective patterns with overlapping waves - as they try to seek order, meaning a direction. When the direction is found, markets thrust rapidly to a new plateau, where they pause to find direction again. Like all non-linear chaotic systems, markets tend to be on the edge of chaos most times and in rapid thrusts occasionally. 

The blue lines in the chart aptly convey the trading range, and the momentary breakout above. Often a trading range of a chaotic plateau shows a false break below (as we see at the end of September) followed by a false break above - which is what the whole month of October now appears to be. When a thrust fails to sustain above the prior plateau, a reversal is in order. We saw in 2009 a thrust out of a multi-month trading range, and the market never looked back. This time we have fallen back.

It is now crucial to head north again in that proverbial Santa Rally. If we do, the break above is still on. We should then run up into January, and we might confirm a prediction of several years ago by Bob Prechter, that the top would be in January 2012. But we really only have a week or so for this to occur.

One of my readers predicted I would blog again when the perma bears like Prechter went bullish. Alas, they remain super-bearish. Let me finish below the fold with a recent Interim Report from EWI so you can see for yourself their latest view. It may be that even their January 2012 prediction for a top was too bullish for the currenct circumstances.  

Skip Danger Forum

As I wind this blog down, I recommend readers check out the Skip Danger stock forum. Frequent readers of the comments know that it is a place to continue the sort of dialog that made this site worthwhile.  If you do go check it out, drop back and let me know what you think. 

Broken Pattern, Token Risk

I appreciate all the concern in the comments on my transit back through Narita, but it came and went and I still have my hair. I spent about an hour in transit, and the food on the return was worse than normal, telling me that it was not sourced from Japan. 

The risk I took was very low. I wrote about it in my other travel blog: Bananas Are Radioactive Too. The risk I took was about the risk of a daily commute. You guys who commuted for the six working days I was gone were taking on much more risk.

Investing trades in risk and investors get it wrong all the time. Right now the bet is not to fade the Fed, to believe QE Infinity will continue to pump this market. The calls to end both QE and the zero interest rate policy (ZIRP) are increasing. Andy Kessler just explained in the WSJ how ZIRP crushes capital formation and stifles the recovery. Risk on.

The other bet is that the four-year re-election cycle will pump the market. This is the most predictable cycle, and its causation is clear. Yet Obama shot this bullet early, right away in fact, and the Stimulus is already fading to the point it is acting as a drag on GDP. He is facing political headwinds from the grumpy Republican House, and if he loses QE, he is left with only a war to pump the economy. Libya? Yet another Middle Eastern war threatens to keep oil prices high, acting as a bigger drag than war-spending. 

You can see the impact of this in this chart showing the current market vs. the normal re-election market. Now, "normal" here is an average of many years, so we should not expect any one market to actually match the curve; also, the curve is not combined with statistical variability (eg. Bollinger Bands), so cannot we easily assess if this one is still within the bands of "normal". The key, though, is the extent the recent dive has taken this market off the normal pattern. Broken pattern betokens bigger risk.

Skip Danger

The news over here in Asia about Japan is not as strident as Americans see back home on CNN. My family keeps urging me to skip danger and fly some other way home than through Narita, but there is no evidence of radiation floating down towards Tokyo. Of course, winds may change. 

A more immediate danger I have been facing is to my pocketbook & digital lifestyle: Internet at my hotel sucks. To skip that danger, I scored a great deal on a 3G SIM in Singapore, and wrote about it in my travel blog. Just a few years ago we marveled at going hotel to hotel around the world and staying connected, but now the expense and limitations of hotel Internet are glaring. Rather than suffer $150 during my stay for lousy connectivity, I found a way to pay $15 and get complete 3G nirvana. If you travel, you might take a look. The wireless world is rapidly eclipsing the wired. 

For you traders, it has been a big week. Some of you are dog tired. Time to lay back and enjoy the weekend! Your favorite indicator, one way or the other, the STU, expects a bigger slide next week. So far this correction has fallen in three waves, and today's reversal has all the earmarks of a wave 4. If instead it pops on Monday above 1294, something else is going on. Better news on oil (Libya) and my flight home (Japan nukes) could spur the pop.

Of course, if the global winds shift, all bets are off. The G7 intervention is already fading, with the USD down to new lows. The toxic Dollar cloud may drift over Tokyo, too. Japan may begin to swap Treasuries for Yen, bringing the wealth back home, and unbalancing the Fed's QE plans. 

Another site you might want to check out is Mamma's new Skip Danger stock forum. Frequent readers of the comments know that it is a place to continue the sort of dialog that made this site worthwhile.  

If you do go check it out, drop back and let me know what you think. 

Transiting Through Narita

I just posted on Narita, the Nukes and United over in my travel blog. Take a look. If typepad asks for a sign-in, cancel and you will be in. It is a glitch on their site. Feel free to continue the discussion in this post.

Special Bulletin

It is with great trepidation that I post this, given my prior post, but the comments are overflowing & I wanted to give frequent readers a forum before you jump (or not jump) to "Mamma's" new place. Have at it, and as a treat a little technical analysis below the fold.

New Blog Platforms

Planet Yelnick began as an email exchange and then a private newsletter after the dot-com bubble burst. Been a great ride but I am changing focus. A new tech boom is on and my attention is there. My new blog platform is: http://bullpencap.com/.

For fun I will occasionally blog about travel and cultural issues. In a week or so the travel blog becomes the new Yelnick start page. 

Employment Brackets the Over/Under

The over/under is a betting level: the predicted points in a game. Last month employment disappointed, but it was blamed on weather. After that report, the catch-up level was 260k jobs in this report. We missed that by a mile. The catch-up number was lowered since then down to 196k by those mysterious "they" who set expectations. (At least in Vegas we know who the bookies are.) This report came in bracketing the over/under:

• 192k new jobs, below 196k expectations
• 222k private sector jobs, above 200k expectations

Stocks are down today, possibly reacting to an under. More on that below. The spinmeisters are out in full force, however. Just before the report the herd expected the over (60% thought it would beat). After the report the consensus of opinion appears to be this comment from CalculatedRisk:

This wasn't a great report. Heck, it wasn't a "good" report. But it was a little better than most recent reports.

At this stage in the business cycles, upward revisions are more likely going forward, so this report should improve with more data. What is less clear is if new jobs will ramp up, or just remain steady - the average between January and February is only 127K new jobs, below what is needed to keep up with new entrants to the workforce. The 192k number is a catch up from a dismal January number of 36k, which was revised up to 63k. 

The market reaction has been mixed. Bonds improved but reflect a reasonable chance of a rate increase later this year. Stocks may be reacting to a modest recovery, which makes QE3 less likely, and would remove the speculative pump under markets. On the other hand, the report shows no surge in wage inflation, meaning QE has not yet spilled over into wage inflation:

The below-the-surface issue with the report is a continued detrioration of the overall employment picture. While the unemployment rate is down, the rate of participation and the ratio of employed to population continue to fall even faster. This means statistically the unemployment rate has dropped not because of more jobs (numerator) but because of fewer workers (denominator). Without those dropouts, the unemployment rate would be 11%.