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.