The Iranian nuclear deal may catch Oil and Gold investors in a Bear Trap. Initially it will be very negative for both - Oil and Gold should drop - as war fears had built a risk premium into these assets. When Oil gets and stays below $90 it should spook a lot of other markets by raising Liquidity issues. It is after that we may see a bear trap as bears pile on the dropping assets. This will, however, unfold slowly.
Yves Lamoureux sent a message to that effect, and will follow up with more specific recommendations. His chart on Gold shows the coming drop as a fifth wave down, indicating end of trend. He also expects it to show capitulation, necessary prior to a trend change.
For fun I post the pattern comparisons to past crashes. Recently bears tried to compare this relentless up market to 1987 (fail) and 2007 (fail). The latest is to 1937, which at least has an historic logic to it: we are in a new Great Depression, which is following a different path but may end up even worse for cumulative loss of GDP.
More to 1937, the sequester led to the Budget Control Act, which has remarkably lowered actual Federal spending for two straight years (that hasn't happened in a long time) and reduced the deficit both in nominal Dollars and as a percent of GDP. This reduction of Federal stimulus has made Keynesians nervous, since they worry that it is similar to what happened in 1937 to throw us back into a Depression after the New Deal seemingly had brought us out.
At a broader level, comparisons are often made to 1929=2000 but it seems 1929=2008 is more apt. Looking to the period before 1929, we find a curiously comparable story:
- a tech boom in 1914-1919, the auto bubble (vs. the dot-com bubble 1994-99)
- a sharp recession (1921, 2001) followed by a classic credit bubble (Roaring '20s, Housing Bubble)
- a banking crisis followed by GDP drop and persistent high unemployment (1930s, 2009-now)
Now today the Fed is back to talking of Taper, which could spook equities.
Enjoy the stock chart eye-candy.
Our frequent guestposter Yves Lamoureux, president of Lamoureux & Company, a market advisory firm based on behavioral economics, has a view on stocks: up! Neely sees the S&P in a final thrust up. The grinding climb of the Wall of Worry that has characterized this market since 2009 will continue until a final, panic-buying stage sets in. We may be now entering it. From Yves point of view, so what; a tumble in 2014 will simply set the stage for more appreciation downstream. Two competing lomg-term views that share a short-term prediction. Enjoy Yves perspective.
Climbing a wall of worry at its best
We are of course not surprised at the reaction of players who have missed the rally.
They will spew any and all reasons for this market to crash. Yes, it will eventually encounter a degree of such devastation that we would rather keep our timing to ourselves at that moment.
The gigantic money inflows was and is still the driver of this great move. There is more money on the way. It should be showing, as we have repeatedly explained, an exponential tendency.
We model interest rates for the next 15 years and believe that savings will never carry an explosive growth path of debts.
Forward looking the gap will only increase faster. This spread in turn will pressure bonds lower. It will wipe out a generation of bond only buyers or what we see as income oriented investors.
People argue that stocks will rise as the economy performs better. We are not of this school of thought. We object to much improvements going forward for developed markets.
Our behavioral work distinguishes between losing assets and winning ones by carefully tracking shifts in sentiment, which fundamental analysis disregards.
Being long the euro currency this year best exemplifies this kind of approach.
Two recent shocks over the last decade have profoundly shaped the perception of investors. This has forced a re-balancing of assets in favor of income. This is coming exactly at the heels of the greatest acceleration of debts worldwide.
I did use the word crushed in an appearance on Yahoo Finance to describe what was at stake for bond investors.
We will not sugar coat our language when it comes to interest rates. We have tried to shock portfolio managers in presentations this year.
We can only describe the level of apathy we have seen as unbelievable. This is what a 30 year bull market will do to public opinion.
Our bullish stance has been validated this year with great returns.
We do suspect that we are heading for a rather tumultuous 2014. We think it is a bump in the road.
Our forecast for the Dow to double from next year's low point remains compelling.
As long as the market climbs a wall of worry, we will climb profitably with it.
Planet Yelnick got a good plug from The Wall Street Journal's MarketWatch over an analysis by our frequent guestposter Yves Lamoureux, president of Lamoureux & Company, a market advisory firm based on behavioral economics. Yves has come back with a new update on gold. He made a prior prediction (in this blog) that turned out to be prescient. Now he is back with a new update:
Yves on Gold Update Part 2
We are amazed that a 2 months bounce can create so much attention on gold. We feel this is misplaced as oil is the asset that best gives out conditions of the macro environment. We suspect that few would entertain an Asian and European growth pick up at the same time. We do as we wrote recently.
All eyes have been focused on the economic negatives as the market demonstate a tendancy to go exponential more and more.
We think that the next few years will be terrific for stocks but these trends will be best explained as behavioral trends
Gold has perfectly set out to bounce in a typical corrective fashion. Any good Elliot Wave technician will know what to expect after an ABC bounce: new lows ahead.
After the big gold drop, as expected, targets were lowered to 1000 $. How convenient is it to know this after the fact?
We kept you protected by issuing to avoid at all cost the metals early in the year and have stuck to our scenario all year. We knew that gold would bounce and be unruly after the analysts adjustements. So here it is with a 2 months bounce, the same behavior comes out of the woodwork as we suggested would happen.
In a certain sign of defiance talking heads are back claiming that gold will rally. We are sure to dissagree with this at this particular juncture.
We therefore forecast gold to head to 1000 $
Our proprietary model has flashed a third signal here and now. Both signals this year had preceded large drops.
We remain massive gold bulls long term. There will be no alternative to credit default in the future.
Albert Edwards prediction: sees the Emrging Market economies collapsing,driving down US stocks and reversing the recent rise in interest rates to a sub-1% 10-yr Treasury. In his diatribe, he references Zerohedge and its wont to show analogies to 1987, like this:
I have run a number of these sorts of charts over the years, including recent 2007 comparison, and none has come to fruition. So treat this as stock market eye candy.
Edwards does not say a crash is imminent either; he thinks hte next shoe to drop will be China in Q4, and will come with a rather shocking devaluation of the RMB. That could spook markets worldwide.
What to do after the interest rate spike?
This is a very important Guestpost from Yves Lamoureux:
From Bond Apathy To Panic
A harbinger of the next 5 years
We have been glad this year to be on the side of the bull camp. Our job has been an easy one as we pursued the long side of stocks. We remain bullish despite raising big amounts of cash many weeks ago. We think we can redeploy money shortly once we feel the corrective phase is over.
It has been a much different story on the income side. One that shows only the start of something much bigger. We did forecast long bonds to drop to a yield of 2.5%.
For us that was the marker both in time and price that satisfied our interpretation of the end of the bond bull market.
It is our opinion that we are just in the first leg up in rates. Once completed we favor a correction that can last for a little less than a year. The second wave, we feel, will be as large as this recent move. This is why late last year we urged to look at a new asset allocation system based on credits only. We felt that rates would be at 3.5% mid year 2013 and a target of 4% year end 2013.
Our new forecast for 2014 on the long end now moves to 4.5%
We have had this scenario in mind for many years as past episodes rhyme in time. Our work is both based on comparative money velocities and behavioral economics. We tend to think that fear and greed are always the same. They tend to repeat more frequently than market theory allows us to believe.
In recent presentations, we are amazed to observe the level of apathy toward the recent action of the bond market. It does match up behaviorally speaking with shock and the lack of preparation.
Investors have convinced themselves that rates are staying low for a prolonged amount of time. Of course this conviction will not be proved wrong rapidly. Over time, as we have suggested, money will leave the bond market to head to the safety of a term deposit at a bank.
Having been proved wrong twice about stocks makes the return back for most impossible.
The great difficulty in this environment will be the lack of perceived safe alternative. It is also why midterm we are very bullish on gold even if we have avoided it all year long.
We think there are many pitfalls ahead that people will not avoid. We prefer to stick to being long indices as opposed to stock picking.
Rising rates will reveal the extent of debt levels. It first will be marked by companies cutting dividends. Bankruptcies will follow. It will be harder and harder to perform with the benchmarks.
Being long an index also has a positive survival bias. Bad stocks are replaced with good ones. The odds are in your favor with patience.
It is not the same say in the case of a bond fund. As rising rates will pressure your investments lower and lower. Doing nothing is sure to undermine your strategy and goals.
Dividend stocks are as much in a bubble as bonds are. We think its best to avoid income all together.
This will be a time of reflection. Some investors are not meant to be in the market. We expect a mass exodus of money that will be moving back to bank accounts.
Of course it is not what most in the financial business would like to hear. Markets are markets and they tend to behave in a certain predictable way.
The key to some of our future forecasts come from the inversion of the behavior in the treasury market.
We have been great believers in using treasuries as stock hedges in a portfolio.
We think this era is over as we have predicted well over a year ago. We are of the opinion that treasuries will revert to a positive correlation with stocks.
They will go up and down in price with stocks.
This is far from expected behavior of the last decade when treasuries rose in price when stocks fell.
Asset allocators welcome to your new playing field.
Emerging market implosion
We read with astonishment that deflation is over. The sudden drop in both emerging market currencies and stocks is testament to further aerial bombs we suggested would happen recently.
We are in complete disagreement over this topic as deflation shocks being short and fast creates lasting disinflation
The wipe outs are dramatic in many cases. Caught by surprise many have been.
Where people now see a bust credit cycle we see opportunity. The flow of hot money had created huge imbalances and a perception of superior fundamentals. The king is now naked.
We are taking a hard look at re-balancing our cash into some of those interesting emerging markets.
It reminds us of European markets that nobody got interested in because of fear. Recent positives on Europe had us unload these plays at much higher prices than a few months ago.
Interesting times indeed!
I have seen an increasing number of chart comparisons to 2007, right before we entered the Global Financial Crisis and suffered the 2008 crash. PragCap has a good discussion of this, here, with this chart:
Jeff Saut gets credit for first popularizing this meme. John Housmann has also picked up the thread. One upcoming event that may spook the market is the GDP report. Predictions have been sinking, now below 1%, essentially stall speed. The first shot across the bow may be around August 7.
Guestpost from Yves Lamoureux:
We could not have been more ultra bullish on stocks since the start of the year. We are now concerned, as we had stated, of a fast unwind of leveraged positions. We have correctly called the bond and gold crash. That relationship is clearly evident.
Leverage worked perfectly when rates "WERE" low! They are not anymore. A quick survey would have yield getting to be twice of what they were at the lows. We had clearly defined our views of front running the bond market the other way around this time and it has avoided us this really big break.
What concerns investors avoiding stocks should have is simple. They are attempting to flee a stock correction by having invested in various bond investments. From high yields to corporates, everyone seemed to have the perfect solution to offer these stock refugees.
It will not have the desired effect. These investments will show the same correlation to the stock market. In a market correction they will feel a double blow. One from rising interest. The other from an economic slowdown.
On this subject, we have written extensively at the start of the year. We feel strongly about dividend stocks being in a bubble as much as bonds are. You can download our text dated December 19th that talks about these issues.
We have in our model a first clear danger sign of an economic slowdown in 2014. It can not surprise anyone that the back up in rates will filter itself through the economy and the housing market. This has been a recurring theme on our part.
The breakout of oil out of a triangle is an ominous sign as well. One that surprises us given the weakness in macro economic indicators. We are observers only and do not carry any oil positions. We certainly feel quite uncomfortable about a market that behaves outside of its normal supply demand equation.
Most participants have been taken aback by the fast rate rise. We certainly do not feel that the selling process is over.
When the quarter ends people receiving their statements will react to the drop. The slow crowd has yet to react!
The latest selling could in fact represents just the tip of the iceberg.
We view the Taper Talk as a huge monetary policy blunder. It has given the leveraged crowds a reason to rush for the exit.
Our beliefs still hold that rates were held too low for too long. It has given way to bizarre investment behaviour.
It will be resolved eventually as an implosion of cataclysmic proportions. More on this later.
For now, we have decidedly pulled in our horns. The fast drop in value of bonds in effect counters a lot of the quantitative easing. A great win for bond vigilantes who apparently were non existent anymore and a resounding echo all the way to the land of the rising sun.
We will carry on with our own attacks shortly as we pass on to our subscribers our next moves. The target on the FTSE that we had set was reached perfectly. From the top, the drop appears to be in a five wave sequence. The recent rally a corrective bounce. It is quite worrisome to think about the next wave.
We are enthusiastic about gold forming a bottom in the near future. Our latest missive describes what we look for in creating a bottom. We also show why people have generally been wrong on evaluating gold metrics.
The second half looks promising but shows up also with plenty of potential hazards.
As panic sets in, Yves Lamoureux is preparing his next bold call. As reported here, he called the peak in gold before other pundits saw it, and made other bold calls that have him now referred to as the new bond and equities guru. Here is a copy of his Feb 8 newsletter on point: Download Lamoureux_Finally Why Gold Will Be Rigged Higher.
His most recent views on economic conditions are summarized in this post from several weeks ago. We now have hit the inflection point he predicted. The reversal in bond rates is truly stunning:
The next phase of global volatilty is a surge of liquidity from a final central bank effort to prevent the reversal of rates and unwinding of all their efforts since the Global Financial Crisis of 2007. Yves expects this Financial Surge will float all boats, including gold.
The pattern he saw in gold back in 2010 is now coming to an end, although not imminently. He recommending going long on the Euro and short on gold when the consensus was short Euro long gold. He remains a Euro bull for now, and will be super bullish on gold at the right time. Watch here for his guestblog when the time is nigh.
Yves has an update to his recent posts:
Sitting on an Inflation Powder Keg
Voices of hyperinflation have been quieted down. We have agreed with participants on the matter but not on their timing.The economy has shown more resiliency than economists expected. We have been and remain bullish.
As fear dissipates, we are sitting on an inflation powder keg! Massive amounts of liquidity will move back to real assets in due time. It has been a slower process because there is a lot of fear out there.
We think that we are now nearing this inflection point and it is quite exciting. Our advisory services already look to score nicely for the first half as we have been mostly long stock indices only.
It has been brutal for many markets. Money managers have unwinded bets on the conviction of a slowing global economy.
We think the second half provides hope of picking up great plays to finish up the year strongly.
Already amongst the back drop of a slower macro economic picture bonds should have rallied. They have not and the drop took players by surprise.
It is further proof that we are turning the page. As our forecasts are right on, we have growing confidence in our outlook of a better coming future.
A massive liquidity wave is coming. We feel that it is going to be exciting. Participants are unprepared !
Yves Lamoureux http://lamoureuxandco.com/
Since The Bernank spoke last week, the Japan markets have been in turmoil. Stocks have fallen over 12% in just a few days, and, most troubling, bond rates have risen sharply. See chart, courtesy Zerohedge:
In the US the fear is that the Fed will be unable to taper off QE. The Bernank's remarks last week were of a taper, and yet in the US the 10 year has spiked above 2%. There is a concern that if rates go above 2.2-2.25%, the biond portfolios will begin to rotate their mix of long and short bonds, essentially causing a spike in the ten-year which might shoot it to 2.5% - the so-called Bond Convexity. If this happens, expect the Fed to stop the taper and jump back in with (say) two months of QE in one month, to drive rates down.
This would be quite a good buying opportunity of the ten year. It also may signal that even the Fed will face issues in trying to taper and avoid losing control over rates.
Japan's effort at super QE is likely to export its deflation to trading partners. John Mauldin has a long a analysis of this in his current newsletter. Our occasional guestblogger Yves comes to a similar conclusion. He wraps it into several conclusions:
Stocks: his bullish indicator has turned Yellow - time to take profits. It may shortly go into full sell mode. Neely has a similar view, that we may be in the final capitulation UP above S&P 1700 before a dramatic reversal.
Bonds: the effort to reflate the Japanese currency has caused damage to the confidence of Japanese bond investors due to a big pullback in bond prices. Ignore the bond vigilantes at your peril, Yves says! The vigilantes will work against the effort to reflate by dropping bond prices and negating monetary expansion. Instead, if this rolls into an even larger correction, it is deflationary.
Currency Wars: the drop in the Yen (30% so far) has a short term impact on Japanese profits due to increased sales (largely to China) but engenders a currency devaluation by trading partners. Already calls in Europe for a more expansion ECB approach. Profits in countries around Japan that also export to China - Korea, Hong Kong and Taiwan - are being hammered.
Deflation: The weakening of the Yen creates deflation in trading partners due to their relative currency strength, at least prior to a competitive devaluation.
US Dollar: In general it is thought to be going higher, in part due to the export of deflation by Japan combined with competitive devaluation by trading partners, and eventually Europe. Yves however thinks it is shortly to weaken, especially if the bond vigilantes thwart the super QE of Japan.
Amazing drop in gold this morning. First Bitcoin last week, now Gold. It hasn't declined this sharply since the prior all-time peak in 1980. One of the major goldbugs, Dennis Gartman, has written that in four decades of gold trading, he has never seen such a bloodbath.
Of course, if you follow this blog, you were well prepared, as Yves called this months ago.
Goldenfreude is the pleasure of seeing goldbugs lose their shirts. A lot of prosaic punditry trying to explain this, and getting it worng. Most of the immediate selling was out of Asia, and was caused by Abenomics, the shock and awe of massive QE by the Bank of Japan. Buyers of Japanese bonds may have been leveraging their purchases by using gold as collateral, and now are liquidating to cover as the Japanese bonds plunge. The proximate cause for the two-day rush to the doors is likely Friday's China GDP report, showing a slowdown. Commodities are also taking a bath.
This should not have been "unexpected", the common word used by mistaken punditry. We had two large gold sell-offs during the Great Recession, both driven by expectations of massive central bank intervention:
1) July 2008, right before the Lehman debacle and following on the heels of a parabolic blow off top in oil
2) September 2011, as the Euro crisis hit and central banks intervened
You cna see what the gold plunge is predicting: another bout of central bank intervention to keep the wheels from flying off the global ecopnomy. The first out of the blocks is the Bank of Japan's QE. The punditry expects the massive BOJ QE to respark inflation. Gold is signaling the opposite, of deflation.
Milton Friedman got the punditry thinking that inflation was due to the increase in base money (central bank money and reserves), but this is too simple:
1) The Quantity Theory of Money had inflation as based on quantity times velocity of money. Velocity has plummeted in the Great Recession to levels BELOW those of the Great Depression.
2) Modern Monetary Theory has popularized the view that the quantity of money is not based much on base money, but on bank lending, as banks create the quantity of money. Put another way, banks do NOT lend out of reserves; they lend out of opportunity and then scramble to find reserves if needed.
The striking increase of bank reserves, and QE, have done little to spur bank lending; the reserves sit in the vault so to speak. Instead, QE has spurred excessive speculation in assets, what Minsky called the Ponzi Finance stage. Asset bubbles rage back and forth across commodities (oil! corn! coal! Bitcoins!), debt and margin are used to juice returns, and as each bubble collapses the velocity of money shrinks and the speculators fall back.
Japan is now (as John Mauldin aptly puts it), a "bug in search of a windshield." Abenomics is leading to money washing back and forth across the globe, much as Hoover wrote in his memoirs about the sovereign debt crises of the 1930s. Is Cyprus the new CreditAnstalt? This is not how a real recovery begins, but how a false recovery ends.
Now to Yves update:
Our target of 1450 $ is in sight!
We have been bullish through a decade of bearish action on gold. We have equally been bullish over a decade of bullish action on gold. We have always been bullish through bull and bear market on gold.
We have learned to sidestep the market when desired. This sets us apart.
We adopted a neutral stance two years ago. It was meant to suggest a long pause and/or correction. This adjustment would be a combination of time and price.
We think players do not understand the length of the cycle. Our model suggest rising rates for 30 years.
It is with great excitement that we watch what is happening.
Gold is driven by the future perception of the US dollar. It is expected to go higher. Money managers have completely redeployed funds into the buck. They were substantially under invested at the start of the year.
We have a different view. We view the euro currency in a new bull market.
Gold bugs should stand up and listen ! You will get a weak US dollar in a coming future. The way you position yourself in light of events will be exciting.
AllAboutTrends midday update shows how the S&P is following a classic structure: it dropped below a recent trendline of support, came back to retest from below, and has since fallen off. This is a bearish sign, at least with respect to the rise since mid-March. The bears are out quickly to say "it's the end!" while some more cautious pundits like Neely see a final and more vioent upwards thrust to come.
We are now very bullish on Chinese shares. We called the top here in 2007. It was a few weeks before the market hit 6,000 on the Shanghai Index. The piece was called Party Like Its 1999. It focused on similarities that bubbles have. The rate of ascent was becoming parabolic and was unsustainable.
For most of the punditry, it was the Chinese miracle. I guess people never learn. Participants have the hardest of times to shake off their biases once in a bubble.
I have been a witness to long term negative sentiment toward Chinese shares in the 2003-2004 period. I felt that the sequence had the hallmark of a final C wave. I got very excited in 2005. I felt very strong that the market was prepared to go up in a final 5th wave sequence. I was right. From a base level of around 1,000 the index proceeded to trade to 6,000 in a little bit over two years.
We did explain to our subscribers recently that there are great dislocations between the economic reality and the stock index behaviour. It is even more prevalent with the Shanghai market.
Years of impressive growth have never guaranteed a higher market. Why would it matter now?
The stocks have this uncanny ability to confuse most participants anyways.
We have held to our bearish stance since 2007 to only turn to the bull camp recently.
We are very bullish. We think that we are facing a wave 3 of 3. This large sequence could in fact propel the market back to its old highs. The market could double and even triple from here.
We remember a time where Chinese funds were the rage. They are not anymore as they have lost their popularity. Long term sentiment is very negative toward China. We believe it is consistent with the psychology of a corrective wave two.
We think Asia has the upper hand in the debate of credits versus debits. Most of our work is derived from behavioural economics. We think it better lends itself to today's environment.
Market observers are out of touch with today's world. Do yourself a favour to dig in the past as it is very revealing of our future.
Yves Lamoureux http://lamoureuxandco.com/
For the first time, a mainland Chinese company has defaulted on its bonds. Shocklingly, it is a high-flier solar panel maker that trades in the US market - Suntech Power. Its stock shot up in a classic parabolic FOMO pattern (FOMO = Fear Of Missing Out), and has now fallen like a broken windmill blade below the parabolic liftoff. The irony is that Chinese solar makers have used easy credit to scale up, and throwing the solar cell market into a huge glut, crushing Western manufacturers; and now it is coming back to bite the Dragon by its own tail.
Sure, it could be a one-off, but Chnia's corporate bond market is much larger (adjusted for GDP) than the US equivalent and is highly misallocated due to easy credit and political malinvestment. While unconnected to the Euro crisis, coming so swiftly after Cyprus, it may be another harbinger that the wheels may be slowing coming off the global credit train.
The EU decison to sweep 10% of deposits may signal the beginning of the end for kicking the can down the road. Cyprus itself is small, but its banks have been attracting deposits and lending to high risk countries like Greece in amounts much beyond the Cyprus economy - and attracting foreign depositers (particularly Russians) with high interest. (In the US this is restricted - as a bank gets into trouble it is not supposed to be able to issue high-yields on deposits.)
Banks runs have swept Cyprus, and the government has called several days of bank holidays to get a vote on the bailout through before depositers can get their cash out. It is not clear the votes are there.
Sunday evening in the US, currencies are racing to "risk off" (ie out of the Euro and into the USD). The S&P is approaching the point of the Triple Top, and is certainly close enough that any drop from here may signal the end. Technical signals are sending warning signs, such as this chart from Zerohedge that shows stocks again at nosebleed levels vs. forward earnings, just like the prior two tops of this Triple:
The Cyprus bank-runs are eerily like the beginning of the sovereign debt crises in 1931-2 that drove the global economy off the edge. The same sorts of events seem to be unfolding, but in slow motion as central banks dump liquidity to stem the crises.
You might think that it can't happen here in the US, but it did, in 1933: FDR confiscated gold in exchange for paper Dollars, then re-valued the gold ratio from $20/oz to $35/oz - effectively confiscating 40%, well beyond the Cyrpus action. Because transactions in the US stayed priced in Dollars, it appeared to be a wash, but inflation began as US prices re-marked to real money.
Martin Armstrong, a student of financial history, looks at this and conjectures that when the Fed faces a similar crisis, for example when it begins losing control over interest rates and has to get more buyers of Treasury debt at low rates, Treasury may issue Savings Bonds and Congress pass a law to force purchases of them. This acts like a gold swap or deposit sweep in that the forced savings are likely to be traded into an illiquid and below-market asset, the savings bond. He calls it Patriot Act II - a good patriot woud buy the bond.
Short term, however, this may be bullish for the US as money races to US assets as a safe haven. After an initial jitter in stocks, the on-rush of foreign capital spikes the S&P to new highs. Looking at the market since 2000, it appears to be in a trading range, but over-shot below the bottom in 2009; typically it would now over-shoot above the top of the range before the end.
The market seems to be in its final run to an epic Triple Top back to 2000. Chris Martenson supplies a nice piece of analysis, expecting a 40% drop after we top. His chart shows this in the S&P:
Zoran Gayer, whose analysis updated Wave Theory with Chaos Theory, demonstrated how triple tops are good indicators pf trend changes. The Chaos Theory view, which is based on Thermodynamics, is that markets move in Thrusts and Plateaus, where a Plateau is the market on the edge of chaos, seeking order. A Thrust is order. All non-linear chaotic systems show this behavior, including weather and market economics. The formation in the S&P is a classic Plateau after a really strong thrust up in the '90s. The Plateau does not pre-determine the next Thrust, but Zoran found that after a triple touch of a trendline, the Plateau usually was showing exhaustion and the Thurst coming out of it would be the other way. In 2002-3, for example, we had a strong Thrust down, then a triple bottom in what he called the Iraqi War Triangle, followed by a Thrust up into 2007 that marked one of the largest asset bubbles of all time.
The timing of the triple top looks to be within the next few months. Seasonal patterns usually top around April or May, followed by a correction into September. Some pundits (like Neely) expect a sharp rise towards SP1600 in March, with a top in early April. Whichever it is, expect a bit of a throw-over at the end and then a really sharp "bifurcation" move down to mark the top.
The Plateau since 2000 marks a huge experiment with economic history, where all of us are the guinea pigs: central banks are trying to apply the lessons learned in the Great Depression to reflate the global economy. Problem is, they first created a terrible asset bubble in real estate, and after that corrected, they are now putting the global economy on central bank life support. As more fiscal borrowing is pumped out into the system, nominal GDP levels atrophy as the ever-increasing debt puts pressure on continuing this flow of monetary oxygen into an increasingly-moribund economy. As the system approaches the Rogoff Level of 90% debt-to-GDP, economies began to sag. Europe is already entering recession, as has Japan; and the US is skipping across the 0% GDP level, skating on very thin ice. Worries abound about China as well.
The Triple-Top Plateau therefore reflects markets at the edge of chaos on whether this huge central bank experiment will work.
Looking forward, history says this long secular bear market should last 16-20 years. The last one from 1966-1982 was 16 years; the prior one from 1929-49 was 20 years, and we saw a similar long plateau around Dow 100 from 1901-1921. The Depression of 1874-1896 was even longer, as was the one from 1837-1859. This puts the bottom out to between 2016 and 2020.
Sharp drop today has the bears on the prowl. Technical analyst Glen Neely cautions that in the formation we are in - an expanding triangle (actually nested at three levels), a sharp drop often happens before the top - and is a bear trap. He still expects a final runup into late March or April.
I have been expecting a triple top with the S&P highs of 2000 and 2007 - and we are close but not quite there yet (ie 1565-1600 would be a better finish).
Yet with all this hemming and hawing and cautionary notes, there is one analyst who has stepped up to a clear and brave call. Yves Lamoureux has called the end of the Bond Bull Market, and also a top in Gold, and now calls a top in US equities, before a Great Bull Market in equities. Enjoy!
Is The British Pound Giving A Market Top Warning?
We have been absolute bulls on stocks. Interest rates are too low and have been for too long. The crowd has caught on. We believe in an important market top now. Some observers are calling for the end of the equity bull market. We have a separate view of this.
A solid pullback should be part of a larger degree wave two. We maintain that stocks will double from the 2013 bottom. The market appears, so far, on the path we have been describing to our subscribers since last year.
A correction now would increase our confidence in the next stock melt-up. It is a large phenomenon and best ascribed to risk preference and behaviour. How would you explain the recent stock jump? Most participants are at loss and are mostly invested in bonds. They are playing catch up.
We, on the other hand, are exiting our long stock plays. We have increased considerably risk off positions as described recently in "How to Catch This One Impressive Rally". We are very excited about introducing investors to the coming wave 3 of 3 in agriculture. We suggest direct long exposure. Our timing relies on a proprietary weather model.
We show you today this one clear warning. It is associated with the British Pound. We have seen a similar behaviour back in 2009. The Pound as a precursor is a great tool. You have to combine this with patience as well. In 2009 the Pound started to move down. It did so for many months. The stock market finally caught on. It resulted in the May flash crash. We think similar conditions are in place. The "all in" crowds have a stop loss strategy. Momentum will turn down and we think it could begin a negative feedback loop of selling. Remember that in absolute terms cash is low.
The market has risen with low volume. Illiquidity events are going to be more common in our opinion. They should be seen more frequently as the Fed starts to pull back on quantitative easing.
The Pound in effect acts as an early warning system. The recent drop has to do with a huge UK money expansion. Measured on a year over year changed rate, it is up 100%. We think something more is going on.
You will see above a long term chart of the Pound. We have labelled the drop in five waves. We think the bounce is a clear correction. It is indicated as an A-B-C pattern. This suggest new lows ahead. Is the market now set up to catch on? We think so.
Now is the time for a defensive stance!
Yves Lamoureux http://lamoureuxandco.com/
Why Our Model Values Gold At $1450
We have watched the big wave one and two unfold in the bond market of Europe. We think we have seen the turn. It is therefore likely that a huge wave three in rates has begun in earnest.
It has been our contention that the interest rate cycle would turn in 2010. It did in Europe. We stuck to our 2.5% US long bond call has the recipient of scared money. Massive spikes are always deemed turning point. We explain this phenomenon in “The End Game is Here”.
We attach a lot more importance to what takes place in Europe. Our gold model is geared that way.
The recent behaviour of gold is the best proof. How can you account for a weak gold price when the US dollar is weak? We do cover the grounds on this topic in a recent gold article. Some of the intricacies of movements are popular trades being undone.
The start of a wave three in rates sets up a deflation trap once again. Primary waves all sport typical 5 waves form. The corrective nature is mostly of a zigzag type. This is why we are short 10 years Italian Treasuries from 4.20%.A quick look at wave two is beautiful textbook Elliot. We are now at 4.62%.
The market thinks it has everything to do with politics. As you are a good student of waves, you know better. Keep the cycle in mind as we cover the gold valuation model.
We thought that gold would top in September 2010. We think of this time spent as a large degree consolidation. We have not been at all worried to miss the bull market. We have fully participated in it the last 10 years. The recent bounce is more likely viewed as a B wave. I suspect, we are at the start of a C wave. I factor the coming rates increase. Our model values gold at $1450.
We look to make a big entry once again. We are extremely disciplined and wait for things to be aligned perfectly.
Yves Lamoureux, http://lamoureuxandco.com/
By now it is clear Apple has fallen off a cliff after a parabolic rise. History says the fall will at least retrace the parabolic rise. We saw this recently with Crude Oil rising over several years into a parabolical peak at $147 (cash price), then falling in six months to $31 before bottoming. We saw this in 2000 with a bunch of tech stocks, and in particular the leader at the time, Microsoft. Is AAPL, the leader in 2012, replicating MSFT, the leader in 2000? The charts are eerily similar (courtesy Bespoke):
History also says a bull trap will emerge on the way down, a major bounce where many think they have caught the bottom, but when it reverses, they instead get sliced & diced as if grabbing a falling knife. Same bulltrap happened to crude on its rapid drop. The AAPL false bottom may have already occurred around $500 (see chart). After bouncing at that level, it has hit an airpocket and now seems on a bottomless journey down. A scan of the punditry finds some expectation for a bottom at $410, and I expect that level to catch some bids, but a look at the chart (red line) shows no support level until AAPL gets to the start of the parabolic spike up, at around $350.
Apple is a quality company, and its recent miss seem to be more an anomaly of comparing a 14 week quarter a year ago with the 13 week quarter that recently ended than a sudden break in Apple's trajectory. Hence, at some point, a bottom will be found, and a buying opportunity discovered; the bigger question is whether, like Microsoft's lost decade, will Apple will grow quite strongly but never regain the recent stock highs? Maybe there is an app for that ...
This is really sad for those who believe in a future of green energy, but for investors has sent a clear message: the Green Bubble has burst. Solar City delayed their IPO, Solyndra and others are wrecks of a solar bubble, and Tesla may become the only electric car company standing as Fisker is now in deep financial trouble. The renewable energy stocks are down an astounding 98% from their peak, showing the signature of a parabolic rise into a bubble and a fast linear collapse:
The Real Bond King, Yves Lamoureux, in this video expects a final run up for stocks, in an epic Wave 5 (of 5 of 5): a big wave up that is driven by an increasingly narrow set of leadership stocks, and fueled by a narrowing number of inverstors as most will sit this out. Yves see this as a rotation out of bonds and into other asset classes. The bond market is 10x larger than stocks, so a small distribution from bonds can have a big impact on stocks. Timing: after the current wave 4 correction runs its course. This is similar to the Yelnick View that a final thrust will take us back to the S&P 1550-1600 range, forming a dramatic triple top with 2000 and 2007.
Whne a trendline gets breahced, the market typicaly comes back to test it from below. Will it kiss it goodbye, or show the break to be a False Break? Chart courtesy SlopeofHope:
Bespoke notes how the recent drop is symmetrical with the prior summer drop - 42 days top to bottom. This suggests a bottom with a final leg up still. Tony Caldaro further notes that the recent drop "retraced 61.8% of the previous uptrend [which] fits within the parameters for the typical wave 2 corrections during this bull market."
On the other hand, Zerohedge points out that today's action betrays the signature of a serious short squeeze. When we broke below the lower trendline of the big rising wedge, short interest increased; and often when the market comes back up to kiss the trendline goodbye, it denotes a short squeeze.
Usually the stub week of Thanksgiving is positive, and the following Cybermonday is down, so look to several days action next week to get a read on this market. We came up near the tops in 2000 and 2007, close enough to argue for a triple top, but typically the triple top would be closer (ie. around SP1550-1600). It wouldn't surprise me to see a final thrust up. Given the false break below the trendline, this thrust would likely have a false break above - another short squeeze of players betting on the upper trendline - before the end. So SP1565 is still on the radar.
The primary elliott wave counterview is that this rally is a counter-trend rally in a larger move down, and using the math of Caldaro the other way round, should go back 62% before reversing down. So far the Friday thrust got us 38% back, which is usually the minmum retrace; and now we might see a down move (wave B of the countertrend rally) followed by a final move up towards SP1430 (Dow15K). At that point one of the two scenarios will meet their end; this Shroedinger Cat bounce will either be found dead or alive.
I have posted a number of articles of Yves Lamoureux, President at Lamoureux & Co.. In Oct 2009, he predicted the 30 yr would fall to 2.5% when most pundits - including the then-inestimable Bill Gross -expected a rise to 5%. Yves was right, and I christened him the New Bond Guru. On Friday he published his new prediction, that the Great Bond Bull Market from 1982 is now over. Summary:
Bonds have tended to act as expected as risk preference shifted. However, bonds now have neither a credit risk premium and nor an inflation risk premium. Our proprietary model is clear: treasury paper of 30 years has the correct valuation of 3.50% and above. That is the level we would feel confident as buyers.
He makes an intriguing additonal observation, of a type of hyperinflation, but not the type that is commonly bantered about, a Wiemar-Republic style inflationary collapse. Instead, as we risk more of a deflationary environment from too much debt (deflation arising as that debt gets written off or washed out faster than central banks can print), this time it will emerge from increased credit risk in what heretofeore have been the most risk free instruments - US Treasuries.
The harbinger of this may be Japan, which (as John Mauldin has put it) is a "bug seeking a windshield." The expected new Prime Minister wants to go to extremes of monetization to reinflate their moribund economy. As money has bailed out of Europe, it has found Japan, and the Yen has risen. Now it is being purposely weakened, and has hit a seven month low with the USD.
Investors have been selling the yen since Japan's prime minister announced last week that an election will be held Dec. 16. Polls show Shinzo Abe, leader of the opposition Liberal Democratic Party, as the leading candidate to emerge as prime minister. Mr. Abe has been calling on the Bank of Japan to enforce bolder policies, including unlimited printing of money and setting reserve interest rates at zero, or even in negative territory to stimulate lending.
The MMT view has circulated in financial circles, with the core belief that a currency issuer never need to default. This of course flouts history, where fiat currency after fiat currency has gone down in the sort of credit collapse envisioned by Yves. While it seems almost unimaginable that the USD might suffer such a fate - and it is years away from such a crisis - the Yen may become the first major currency to test the MMT approach of extreme monetization.
Financial observers spend undue attention on stock markets. Bond markets are an order of magnitude bigger. It is now time to watch the bond market.
Now they're talking - posting the STU and the recent Financial Forecast. Click here for free week.
Neely has also gone bearish after calling this really well for months. I know Free Weeks often end up being bullish signals despite (or maybe because of) all the bearish predictions, but this time the broken clock may catch it.
Before you go into withdrawal post election, try out Free Week for more commentary on What It All Means for stocks. As they put it:
Now through noon Eastern time Monday, Nov. 19, your audience can have access to charts, videos, forecasts and analysis pulled from our three most popular services for U.S. Investors - Bob Prechter's Elliott Wave Theorist, The Elliott Wave Financial Forecast and The Financial Forecast Short Term Update (which makes up our most popular subscription package, the Financial Forecast Service, which sells for $59/month). Your audience can experience it all for free!
We have been following the AUD as an indicator of coming divergences in US markets, specifically that the correlation between the S&P and the AUD breaks.
Last night the Chinese GDP report caused a spike in the AUD. The report was in line with expectations, which suggests the AUD was a bit oversold.
Technically the AUD is in a triangle, and so is the S&P. We are expecting a downtick shortly, perhaps into the election, to be followed by a sharp rally.
In the S&P it could touch the 1550 area, a triple top back to 2000 and 2007. In the AUD it could breach $1.10.
The Euro is also at an appaent cusp point. Right now the Forex side of EWI is running a free week in case you wish to click through and learn more. Here is a taste of their perspective in this video about the AUD's triangle.
The election year pattern charts I have been showing have a variety of bases; recent elections only, for example; or dividing between a re-election year vs. an open election year. The broadest look, in the chart below, going back to 1904, shows three patterns: all elections (black line), incumbent wins (green line), and incumbent party loses (red line). We are now at the moment when a divergence should emerge between the stay-the-course elections (black/green lines) and the change-elections (red lines):
Apple is falling to a key support level. It peaked around the levels I predicted, and has fallen fairly steadily since the iPhone 5 first weekend news of slow fulfillment. Now we have unrest in their Foxconn factory. The stock today has dropped and plateaued for the moment right below the 640 support level. AllAboutTrends provides this chart in their newsletter today for guidance on where the stock may be going:
I have been following the Election Year pattern with a sereis of posts here and here. It typically bottoms aroudn October 10 and then rallies, usually signaling that the winner is now pretty well known. It seemed to take that path over a week ago, when Obama surged ahead, but the debate has thrown a monkey wrench in. Here is the chart a week ago:
A few soft days and the bears clamor for P3 down or the end of a large Ending Diagonal. Instead I am watching the AUD. An interesting correlation since the Global Financial Crisis has been AUD and the S&P.
The rationale for the correlation is the Global Scramble for Yield that I first mentioned almost a decade ago - in a low return enviroment money mangers scramble anywhere they can for smidgeons of yield. The Greenspan Put exacerbated this, and so too the Bernank's QE.
The more specific correlation is that QE drives up commodities, something also predicted here, and therefore commodity currencies like the AUD. Australia, however, is now in a bind, as its currency is over-valued for its value-added industries, and its mining exports are suffering due to the Chinese slowdown that may yet turn into a hard landing. Indeed, the AUD correlation broke over the past nine months as China began to slow:
Some traders also watch the AUDJPY corelation, which also broke down.
The bind puts pressure on the RBA to lower rates, to weaken the AUD and support the slowing failing housing sector.
In 2010, CES was all about 3DTV. I thought 3D would flop, or more prosaically, rapidly commoditize as just another feature in a flat screen TV. That certainly was what has happened.
The breakthrough would be to remove the 3D glasses, which is technically feasible as TV processing speeds up, but is just a lab project right now. On small screens I have seen a polarized approach to glasses-free 3D, especially to spice up videogames. Now the polarized approach is being tested on larger screens. A cheaper approach, but also years away, and in the demonstrations I have seen, an approach wtih a very narrow range of viewing (a small sweet spot for the 3D effect). The other method, using faster processing, would create multiple decent viewing angles.
In either case, not likely to hit CES until late this decade. Instead, the Next Big Thing is 4K TV - HDTV at much higher resolution. We should see multiple demo units at CES 2013.
I have been following the election year pattern and it remains on track, with a 2 - 3 day lag (see chart, courtesy PragCap). There is an interesting twist this election, but first a discussion of the general situation. The prognosis, per PragCap:
Looking ahead, this version of the Presidential Cycle Pattern says that we should expect to see a choppy uptrend continuing toward election day, perhaps with some significant “texture” along the way. The strong correlation up until now suggests that this pattern is working reliably. Once we see how the election turns out, we can then figure out which pattern to follow starting in November.
What is interesting is that this version of the chart has taken out the 2d terms and only focused on first term Presidents, a more true comparison to this election. The generic chart that we showed in the prior post combines first and second terms and the behavior is different in each term. Per PragCap:
As a rule, [new Presidents] all typically spend the first year in office “discovering” that conditions are even worse than we were told during the campaign, and that the “only solution” is some urgent package of tax changes, spending, regulations, etc. ...
When a first term president wins reelection to a second term, then he typically does not spend much time in the first year telling us all about what a lousy job his predecessor did. That lack of a persistent negative message seems to work out to bring slightly better market performance right after a reelection.
But with a new president from a different party, investors tend to get discouraged hearing that things are worse than expected, and so the market’s performance during the first few months with a new party president is on average slightly worse than if an incumbent wins reelection. Over time, though, it tends to average out to be just about the same.
This chart shows the comparison of first term vs second term Presidents:
What is different this time is the pattern has not worked well in the last three elections, perhaps because we hit a secular bull market peak in 1999 and have been in a secular bear through the past three elections. The pattern broke in 2000 and 2008 when we had market crashes; it also didn't hold in 2004.
This time there is a lot of can-kicking going on to push the problems to after the US election. A lot of commentary over the past week out of Eruope thinks the latest ECB moves can buy 3 months, and of course the fiscal cliff doesnt rear until after the lection. The one stinker is that we may hit the debt ceiling limit faster than expected, before the election.
Following Nikon's android camera, and not losing a beat after its big patent loss to Apple, Samsung launches a Galaxy camera. Lots of coverage, ranging from "yet another" android smartphamera (gets the award for awkward cleverness) to "crazy attempt" to fuse smartphone and point-and-shoot.
Samsung has added some interesting twists on just having Instagram and other photo apps in your digicam. Like Nikon, they have easy sharing with Facebook et al. Beyond Nikon, and as a part of their fight with Apple, they offer their sCloud version of Apple's iCloud, which automatically uploads all your photos to Samsung's cloud. Other cloud services, like Dropbox and SugarSync also do this, and free you from the clutches of the phone vendor; still, this is a very good idea.
As a camera, it has a huge 4.8" view screen, 16 megapixe sensor, and a 21x optiocal zoom. Pricing unkown.
When AAPL ran up into an interim peak in March, I asked whether AAPL has peaked? I used a chart which showed two potential pivots: at 593-601, which formed the interim top; and 668-677. We have now come to 675 and fallen off a bit. Apple's next big announcement is coming, and often stocks run up on rumor and fall on news. That may be all this is; or, is this the peak?
If you expand this thumbnail of AAPL's incredible run up, courtesy SlopeofHope, you will see a classic parabolic rise pattern. We saw it in 2008 with oil, which shot up to $147 a barrel then fell like a drill bit straight down over the next six months to $32. We saw it with the NASDAQ from late 1998 to early 2000, where it too fell like a dead cat from April to October of that year. And of course in stock after stock and commodity after commodity.
AAPL has now become the highest market cap in history, at least in nominal dollars. In inflation adjusted dollars, Microsoft was worth more in 1999, and IBM was much higher in 1967. Still, a seminal achievement for AAPL, and a warning flag for investors.
I ran a comparison of Google's thrust to its peak vs. Apple in my prior post, supporting the argument of a peak based on analogy. Here is the comparison to Microsoft's thrust up during the dot-com bubble, which shows Apple may have more room to run:
Word of caution: parabolic thrusts end badly, but by their very nature (underlying stampede of the herd) are unpredictable of how high they will run and when they will end. Arguing from a few analogies, like Google and Microsoft, is very thin to base a trade upon. The dynamic for Google several years ago or Microsoft in 1999 were very different than today. This is not an argument for "this time it is different," just a reflection of the über momentum behind parabolic rises, and how the emotion of greed (or for money managers, fear of falling behind) can run for a longer time than a short can stay solvent. Particularly so in this environment, of a Global Scramble for Yield; money managers have to have AAPL to keep up with their brethren, and boy do they enjoy the outsized yields so far.
A little technical analysis may help. Here is the updated chart from the last report, with predicted levels of resistance, now shifted a bit to 671-688, a range we hit already:
This chart from Bespoke made the rounds a few weeks ago, and it is interesting to note that it continues to work as a predictor of this year's election rally. We have continued higher, and now may be in the final blow-off stage into early September.
It is mildly interesting to note that late August/early Sept tops happen in big turns years (1929, 1987 etc.); and also happen in relatively normal years. It is just that in an election year, the summer rally seems to last longer. The correction in Sept usually denotes uncertainty over the election. When it becomes clear who will win, the market rallies again. In 2008, the post-correction rally waited until the end; of course a lot was going on in Sept 2008.
The normal seasonal pattern is a rally commences in mid Oct to early November, and continues into late April or early May, with a mild correctiion in late Jan/early Feb. The market then has a June Swoon and Summer Rally, but essentially meanders sideways into Oct, until the seasonal rally takes off again.
The Election Year pattern shifts the swoon to later, usually after the Conventions, and starts the seasonal rally earlier, unless the election is a cliff-hanger (1980, 2000, 2008).
Of course, this is an average of many different years and circumstances, so don't take it to the bank. Just note that almost every election is said to be critical, that the country is in crisis, that This Time It's Different, and then it isn't.
Unemployment rate up but numbers of new jobs higher than expected. This could signal more workers trying to find jobs (optimism) hence the unemployment rate ticking up is bullish. In the oddball world of BLS numbers, with adjustments, the actual number of employed dropped this past month, but the adjusted numbers are higher; experience has shown that readjustments made next month will give a better picture than the numbers today. But for today, a bullish signal.
Technicals suggest a run up over the next few weeks above 1400, probably at least to 1440:
From the site: "Lines B, C, and D are parallel trendlines based on the lows highlighted via the green arrows. Line C intersects with Line A near 1,280, providing a possible strong level of potential support. In terms of upside, Line D says 1,425 to 1,440 remains possible."
I hold by the view of a final move up to the 1500s, likely getting close to or at new highs, a triple top of the 1550-ish level hit in 2000 and 2007. I now see other pundits joining in.
Carl Futia is out with one of his bullish predictions: Big Up Move Ahead. His target is the high 1400s. The following chart shows the market bottoming at a confluence of levels - bouncing off the 1292 support level, hitting the lower trendline, and remaining above the 200 DMA - and having run about the same time in correction as the prior major correction:
All About Trends also gave a Long Side Trade Trigger Alert this morning in some specific ETFs, and is expecting the same for the S&P, given the retest of the 1292-1296 level and bounce off it.
A lot of other wave bloggers report a break in the down channel, which is causing them to hustle into alt counts. Easier just to see the downtrend as ended. We shal see over the next few trading days.
Prechter has released his recent Elliott Wave Financial Forecast for Club EWI members for free. It is of course über bearish, giving a plethora of reasons for a coming major decline. It is certainly valuable to peruse, particularly around the European contagion echoing history both in the 1930s and the 1830s, the first Great Depression in the then-new US. The EWFF makes a nice comparison between how Biddle's Bank of the United States and the Bank of England tried to stem a tide of bank failures between 1835 and 1839 and the Fed's similar efforts today. They both gave up in 1839, and we had a severe drop into 1842.
Where I see the major difference to their view is the Euro contagion today is first leading to capital flight to the US, which is showing up in bank runs in Greece, Spain and Portugal; and a rise in Treasuries with the ten-year yield getting down towards 1.7%. This capital fight to US assets should spill over into equities, hence help drive a final run up in stocks.
The market bounced off S&P 1292 on Friday's "Faceplant Day". This is a key level, since it marked the peak of the initial Wave 1 rally off the October 2011 bottom at SP1075. This mid-day alert chart from AllAboutTrends shows the bounce:
A lot of the doom-and-gloom Elliott Wave crowd were expecting it to break, confirming (in their counts) that the long-awaited and dreaded P3 wave down had begun. If we had broken it, the rally since last October would no longer be countable as an impulse wave since wave 4 (the current wave) would have breached into the range of Wave 2 (the wave after that 1292 peak). If we now hold above, the current wave since last October looks like a classic C wave, which breaks as an impulse in either a Flat or Zigzag correction.
If this holds, we should expect my predicted final leg 5 up to new highs (since 2009), and a Triple Top at SP 1550 +/- (going back to the peaks 2000 and 2007). If this leg 5 mimics leg 1, it should run for about six weeks and go around 220 points, putting it above 1500. Structure isn't optimal, as we would have expected wave 3 to extend (ie go 1.6x wave 1 or 5). Also, historical patterns would point to a peak in August not July, to be followed by a September/October market drop, so this may run up more slowly than wave 1.
Facebook: Fakebook, FailBook, FacePlant, pick your favorite euphemism for the epic fail tepid offering on Friday (it hasn't failed, yet, although perception here seems to have become reality - no pop, fail). The first half an hour of trading was a mess, and some retail trades ordered right away didn't get filled until after hours. Amazing.
Whatever plagued FB also impacted a plethora of other tech stocks, including ZNGA, AAPL, NTFX, and INTU. Zynga in particular had a wild drop followed by a trading halt before recovering a bit. ZeroHedge's foresenic analysis concluded that software hammered the social software's IPO - software errors in the exchange routing systems.
The NASDAQ head defended his software this morning in the NYT, claiming his system didn't cause the stock to decline. He blamed order cancellations for the trading delays. I guess he doesn't realize that the glitch led to trading confusion, which caused the brokers to back off selling to their retail investors, who then stood aside. So, does he believe that a slackening of buy orders didn't contribute to the decline?
First lesson: FB would have been better off listing on the NYSE.
The expected first-day pop failed. Was this due to routing errors, gross over-pricing, or human mis-judgement?
A lot of the tech press blames the greed of insiders, who upped the amount of shares they could sell in this offering by a whopping 25% of the offering. Or the underwriters, who let it happen. Sy Harding has a more prosaic view, that Zuck's desire for advantaging the retail investor screwed up the normal process. There is also the Goldilock's view, that the offering ending flat means it was priced just right.
I think all these factors had an impact. Some whisper numbers suggested the institutions would have been happier at $36 not $38; and I suspect that when they got pushed aside for more retail investors, they had less incentive to play for the first-day pop (where they sell off some of their position for a quick skim). Worse, letting the enthusiastic retail investor in early removed the piling-on that drives a first-day pop. For the savvy retail investor, if you can get a piece of a hot offering, the offering ain’t so hot.
Second lesson: there is a reason IPOs are done a certain way, and it isn’t all greedy bankers. Google tried to change it, and got a tepid offering. Perhaps the same occurred here. Stocks are not like normal commodities, in that they increase in perceived value as they rise, whereas as normal stuff sells more when it goes on sale. BTFD.
Thanks to the greenshoe, the underwriters most likely have avoided taking a bath. They came in to support the stock at $38. A Reuters piece, widely linked, estimated the potential cost was $2B, well in excess of the potential profit on the offering – indeed, in the JP Morgan derivatives “London Whale fail” level of a huge loss – but this reflects a common misunderstanding of the mechanics of an IPO. (Take a gander at this 'evil banker' sort of post on the economics of an IPO that exaggerate the upside and overlook the potential downside.) The greenshoe allows them to float an additional 15% in a hot offering - a potential profit enhancer - but also allows them to buy back shares in a cold offering as this one turned out to be. In effect, the 'shoe gives them a 15% short position which they can apply against buying back shares without cash. (And Reuters persisted with its misleading reporting even after the greenshoe was explained to them.)
Various investigations will sort out what went wrong. Fundamentally this is such a large float that the sort of first-day pop should not have been expected - even though the people-in-the-know almost universally expected a pop. I must confess, I too got caught up in the excitement; I thought it would open at $44, be driven down near $38 and then rise above $44 to end the day around $48. It did open around $44 – some services have it at $42.99 (WSJ), others at $45 – but of course it never climbed back above those levels. You can see the opening action in this chart:
Third lesson: Man is a herd animal. That is why we get booms and busts, bubbles and depressions.
The biggest fallout of this IPO may be that it will not take the place of Apple in 1980 and Netscape in 1995 - the IPOs that rang the bell on the subsequent tech booms. Instead, it is more of another Google, a seminal offering that did not spark an early Web 2.0 boomlet. You can see a comparison to AAPL, MSFT, GOOG and AMZN in this cute infographic.
My take: FB waited too long to go public.
Fourth lesson: It should have gone IPO in 2009, while it was still in the big growth stage. THAT would have been one glorious pop! And a lot of the value would have flowed to the retail investor, not just the insiders and institutional investors, as they would have caught the great 10x rise from then to now.
I do not expect the FB IPO to put a damper on the upcoming onslaught of other social mobile web IPOs. There are about the same number of $1B+ valued private social companies as public ones, and most will attempt to get public over the next 18 months.
Think of the pop that didn’t happen as the proverbial dog that didn’t bark. FB got out at a huge valuation! It now has a huge cash hoard to go roll-up the industry and solidify its tremendously advantaged position. It will spawn thousands of local millionaires, and they will become a new hoard of angel investors to increase the entrepreneurial fervor that has gripped SF and NY.
Final lesson: Don’t confuse buying a stock with buying a company. Facebook is stronger after their IPO, much stronger, even if the stock weakens.
This chart, courtesy Contrarian Advisor, provides a great view of where we are, and it predicts that the S&P gets to above 1500, if not to 1600, in fairly short order:
The big picture view is that since 2000 we have been in a large corrective triangle that is leading to a triple top in the S&P around the 1550 range, with tops in 2000, 2007 and 2012. The shape of the triangle is a Barrier Triangle, with a barrier around 1500-1600 and an expanding bottom below Sp800. The implication is a drop from 2013 - 2015 down to the lower trend line, meaning to new lows below the March 2009 Sp667 intraday low.
The doom & gloom crowd remains strident in calls for an imminent P3 wave down, despite the inexorable rise of the market. Their position is getting harder to support, if it has even been very supportable for a while. After a big drop as we had in 2008, the bounce usually goes 50-62%, but seldom beyond; if it gets about 70.7%, and especially 78.6%, it almost always goes back to the old highs. We hit the 62% retracement a while ago, and odds then switched to running up to a new high.
An alternative view to the Big Triangle is that the 2000-2009 drop is a classic Flat correction. This makes the wave up either the start of a new bull market - which should exceed the 2007 highs - or a corrective X wave with another down pattern to follow. Since that structure will be horizontal, given how this correction has so far unfolded, it also suggests the X wave will go back to the 1550 range.
X waves are not well understood in wave analysis, since they seem like a "plug" of a failed structure, but they are a very standard feature in markets, especially in extended corrective structures of a sort that don't break as triangles. So far the correction since 2000 has gone 12 years, so a wave analysts should look for a triangle or a series of horizontal corrective patterns connected by X waves.
X waves tend to be simpler than the corrective patterns they connect, and therefore are usually zigzags - sharp rises, as we have seen since 2009. This one seems to be resolving as a large double zigzag, where the first zigzag rose into 2011, and after the big May to Oct correction, we started the second zigzag, which we are still in. Simple fibonacci analysis says it should go to the 1550 range: using the weekly numbers above, the first wave rose 680 points, and the second zigzag should run 61.8% to 100% of the first one. Using 61.8% of 680 points, we get a target of 1544.
Usually stocks run up in an election year - and even more so in the year before - and then correct hard afterwards. Why is not hard to figure: the incumbent tries to get re-elected and uses whatever ways he can to pump the economy, then takes a huge hit in the first year to give his party a shot at another recovery into the next election. This is the Four-Year Cycle, the most predictable stock market cycle because it is driven by actions in the real economy. At a simple level, one could just stay long and pull out before 2013, when a whole bucket of negative events happen, like the repeal of tax breaks that are pumping the economy up.
Technical analysis supports this fundamentals view right now.
I was day-trading GOOG around 2007 when it went parabolic and then fell like a rock. A warning shot for what happened to the market in 2008. Been playing with AAPL in a similar way, and just saw it go parabolic. Is history repeating? First the collapse of AAPL and then the whole market? Check this chart out from Doug Kass:
I have seen a lot of commentary on this chart. "This time it is different!" GOOG was at a 50 PE while AAPL has drifted to a PE that is the same as the whole S&P (which makes sense given its market cap size - "regression to the mean" - It IS the mean now!). AAPL is still growing fast and has continued dominance of its sectors. Etc.
Stock predictions range from a low of $450 to a high of $750, with whisper at $1000, which would value AAPL at close to $1T.
Now, I am an Apple fanboy, and use my iPad and iPhone 4S constantly, eshewing my Android phone (Google Nexus - you get it, prior Google fanboy untll the stock popped), hardily touching my Windows netbook, and sitting in front of an iMac dreaming of a Macbook Air with a touch screen. But I am buying a stock, not a company.
That stock has produced. Looking back, it got to as low as $3.18 in 1997-8, whle generally hovering below $5. Bill Gates bailed out Apple for $150M back then. if Microsoft had held that stake, it would be worth over 100x - over $15B. Microsoft also bought into Facebook in 2008, and that stake will be worth a lot too, but the AAPL return is truly outstanding.
Parabolc runs always end badly, typically with a fall off a cliff shape. When GOOG fell, it had the expected bounce (wave 2) and then fell hard - look at the chart. But parabolic runs have no clear rules. AAPL may keep running. There are a bunch of stock market aphorisms around this, including don't get in front of a moving freight train.
One way to figure this out is to use techncial analysis. Here is a wave chart on AAPL, which says the recent tick at $600 could very well be the end: