Return of Wolf! Wolf!

An old stock market saw says: "it always looks good at the top."  And so it did in 1929.  And 1987.  And 2000.  It is only later you connect the dots and say, why didn't I see that?  And so it goes right now.  We seem to be in an extended topping pattern, but even that is not clear.  If you peruse the many comments in the last two posts, you will see a fairly good set of analyses - interspersed with the usual people trying to be cute, or taking a slam at Prechter.  Scanning the punditry more broadly, two major opinions emerge.

* The first opinion is the return of the Wolf! Wolf! call by Prechter.  On August 4 the EWI sent out a special bulletin, where a possible triangle formation broke down and the pattern was showing that a top was in on Jul29. After a few down days we had a few strong up days with a spike higher on Aug10 than the Jul29 'top';  yet the STU kept at this call.  The Mar7 wave 2 top has held, and with the spike on Aug10, the recent subwave (2) has now triple-topped and faded.  The moment of truth is at hand. Despite the up day in the Dow today, the other indices were flat, and the S&P can be counted as a series of nested 1 and 2 waves down - to four degrees.  As the STU plaintively made clear, they are running out of nested 1s and 2s to count the drift down!  Hence, either it breaks hard down in an unmistakable impulse down - tomorrow or the next day - or their Wolf! Wolf! count is in the doghouse once again.

The STU is not alone in their read of the market.  The Elliotician also sees the high probability count as the beginning of a wave 3 down, albeit not yet the dreaded 3 of 3 of 3, but a drop in the S&P to SP1200.  (Their Refined Elliott Trader program has also deftly solved the nested 1s and 2s problem but putting the end of the subwave 2 at Aug16 not Aug10, a count I expect Zoran to concur with in his weekly report this Sunday.)  Zoran in his last two reports here and here also sees us at the point of Bifurcation, with the higher probability a down move.  Fibonacciman has been noting how the recent action seems to be a holding pattern pending a coming resolution.  Other pundits beyond the Elliott world such as Alan Newman also see a major top playing out.

* The alternative opinion, expressed in this blog by DonTee and in the comments by the many followers of Neely, is that we are in the seasonable down period of the market, and should see (or have just seen) an August top followed by a poor Sep/Oct  before a rally into 2006. 

This second opinion is consistent as well with the broader indicators, which see the storm clouds coming over the horizon, but not here yet. We have previously noted how Greenspan's rate increases seem likely to lead to an inverted yield curve by 4Q05 or 1Q06, which has inevitably led to a recession within 6 - 9 months afterwards.  We have been treated with a bubble in real estate bubble stories in the press, and most recently with indicators of a softening of real estate markets. John Mauldin sent out an interesting newsletter which curiously he has not posted on his site here or here to the effect that longshoremen in Seattle have seen a slackening of containers coming over from China.  And of course the rising oil prices poses a threat to the economy - the other fairly reliable indicator of a coming recession is a sustained rise in oil prices. 

Yet there is a danger to extrapolate from a few data points. Take the longshoreman anecdote.  Is it a trend or a blip?  Rob Kirby looks at a broader range of shipping data, and sees a pattern of manipulation by China rather than a slackening of shipments.  It is worth scanning his data - he has a chart which shows an up/down cycle of shipments over the past two years, indicating at the simplest level a stocking of inventory followed by a period of working it off, rather than a trend down.  A similar pattern is evident today in the US auto market, where "employee discount" promotions have moved stale inventory as buyers expect these promotions to end, and inventory of autos has dropped.  Inventory workdown as well as the Chinese pattern can be seen as bullish, as they suggest inventory buildup to follow; normally excessive inventory is bearish, as it indicates slackening demand. 

Or take the real estate bubble stories.  In Alan Newman's report referenced above, Alan points out that the rise in real estate values has been much more paced than the rise in the Nasdaq or even in the S&P during the dot-com bubble, which was a bubble.  Of course, in some places - always Florida, and often California - the 'froth' in the real estate market is more than that, it is bubblicious speculative fever. 

Or take the yield curve.  Long term rates have begun to inch up due to inflation fears.  Maybe the yield curve will flatten but not invert. Yet, if this happens, the higher rates would at first accelerate real estate froth in the same way car buying went up during the recent employee discounts - fear that the good times are over - and then slam them shut.  Or perhaps Greenspan pulls off the same sort of soft landing that has happened in Australia - real estate markets flatten without falling much.

Back to the Wolf - in the tops in '29, '87 and '00 the drop came well before the storm clouds were clear.  If the herd in the market begins to believe that the storm is coming - inverted yield curve, sustained oil rises, recession, slowdown in China, hard ending to the excessive froth in real estate markets, etc. - it will rush to the doors.  A thunder clap under clear skies.  And later pundits will connect the dots.

Watch the next few days in the market ... but expect the uncertainty to last into 2006.

Comments

[EN]

The US stock indices seem to have built a brick house around themselves because, no matter how hard the wolf blows, he just can't seem to blow them down.

The recent decline is slow and full of overlapping waves. So far, there are two fast moves one can see. From 1248.5 in the E-Mini to 1224.25 followed by several days of overlapping corrective activity (that can be seen as a triangle formation) and then a second fast move from 1238.5. This gives initial targets in the E-mini of 1214.25 and 1199.25. Check out the intraday p/c ratio and tell me this thing is not ultimately headed higher. Listen to the business talk radio shows and the host of technical analyts that say this rally is over. Then try to remember the last time EVERYBODY was correct.

The STU's analysis is fine for bonds and currencies but when it comes to stock indices & gold/silver, they tend to be wrong 80% of the time. What this tells me is that the FANTASY of a Grand Supercycle crash is too strong to allow them to practice proper Elliott with respect to stocks and precious metals; for such assets must sell-off for this super deflation scenario to play out. I cancelled my subscription because their stock analysis can be summarized for the next 5 years as: "Primary Wave 2 is finishing and Primary Wave 3 is starting". I would not be surprised if they bang that Bear drum for another 15 years before they finally shed the fantasy. Their client's short money will whip this thing higher.

I would stick with Neely, so far he is right on track and almost never has to adjust his counts.

[NEoWave Trader]

If you want to make money.

Stick with Neely.

[Buy the Dips]

I agree with what EN said. Prechters FANTASY of a Grand Supercycle crash is simply too strong to allow them to practice proper Elliott with respect to stocks.

In a recent Tim Woods interview (Cyclesman.com) Prechter says he turning very BULLISH after 2014. I'll have to see that one to believe it. Prechter is just too hopelessly addicted and fixated on 1929. I think he'll be bearish to his death hoping for another 1929.

The "1929 hoax" and permabear stance has made Prechter and EWI alot of money peddling books and newsletters to novice investors. I dont see them giving up their bread and butter scare sales tool anytime soon.

[JS]

I have a subscription to the STU. I have made a ton of profits in the last 2 years doing the EXACT opposite of their expectations.

I highly recommend this service as a contrary indicator, even better than the hype on CNBC.

[Greg]

Anyone ever get those 7-8 page folded color scam letters in the mail on stock predictions from some guru? Then the letters ask $300-$400 for newsletters and courses.

Prechter is a master of the scam letter.

I have some old Prechter scam mailing letters from around 1991-1992 when he was hyper-bearish at Dow 3200. He compared the Dow 1992 top to the 1929 top.

Maybe I can dig them up and post some charts and excerpts to show how ridiculous his analysis has always been.

To my knowledge, Glenn Neely has never mass-produced one of those 8 page color stock scam letters to sell tapes and newsletters or capitalized on investors fears like Prechter has done in the past.

[rdneu56]

As long as one relies on somebody elses opinion about the stock market, one will loose money in the long run. You have to put in the work and develop your own methods. Ony then can you hope to have chance.
Based on the comment from NEoWave Trader, I now think that this bear market will resume in 2014, unless Prechter turns bullish earlier.

[Joseph Pugla]

Yeah, Prechter's style is very cheesy and lowbrow and mass-maiing. He's got lots of subcontractors working for him saying all kinds of silly and sometimes contradictory things. The quality control is just not very good.

He might be right, of course, but he sure has been wrong in spades and has preyed upon panic, the very emotion he seems to suggest we can conquer.

A little knowledgeis a dangerous thing. There are so many exuberant real estate investors and stock investors that I have felt a strong tempttion to go short and buy puts that has burned me in the past. I have been humbled. Markets are probably difficult to figure out. Understanding markets might even be incompatble with being a human being.

[Jimmy James]

Is this the third wave crash that everybody is talking about? At this rate, the DOW should reach 400 by the year 4000.