Planet Yelnick

Confirmation of Wave Count

Today went as expected.  The initial down move completed a five-wave pattern since the Sep19 high, marking the end of wave [i].  The intraday reversal began a corrective wave [ii].  More serious downside to begin once this little wave [ii] sputters to an end, possibly as early as Wed, probably by the end of the week. 

Weekly Charts

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To summarize: The movement since last October has been the longest sustained rally in the S&P since 1998, but appears to be ending.  Key indicator is that the small caps are pulling the market down, whereas they usually they pull the market up at the beginning of a bull market.  Key level is whether Dow breaks 9000.  (The STU has a similar key level of Dow8997.)  Market seems poised for a small bounce this week, then we shall see if it breaks through 9000. 

Sector convergence

Wave pattern is quite clearly a five-wave impulse down, which signals change of trend.  Next week should see continued down and a reversal which might last for several days.  Wave pattern also indicates that this trend change will last for a while.  Most likely pattern is down into the Xmas selling season. 

 

What is beginning to emerge is a convergence of sectors across the stock market.  The first sector to suffer was technolgy, followed shortly afterwards by telecom.  The early bear market was largely centered on those sectors, which is why the Nasdaq (heavily tech) and the S&P (weighted towards tech and telecom) fell more than the Dow.  A year after the peak, many analysts were trumpeting the value of not the nifty-fifty new highfliers but the thrifty-fifty old reliables.  Two years after the peak, the Dow had climbed back to within 10%.  Since last March, it appeared that tech was recovering - up 40% on the Nasdaq - and telecom was seeing light at the end of its dark fiber tunnels. 

 

Something significant has begun in the past few weeks.  Bush's popularity is below even, and he suddenly looks vulnerable.  (Yelnick predicted two years ago that Bush would become the next Herbert Hoover.)  The technical indicators are almost universally signalling excessive bullishness.  And now the other shoe is dropping - the other stock market sectors are catching up (or should we say down) to the tech and telecom sectors. 

 

Prechter's monthly newsletter points out in the Big One - the three of the three down - all sectors will be caught up in the backwash.  The bearish pressure will be overwhelming, and there will be no place to hide.  This sector ocnvergence is a leading indicator that the end is nigh. 

 

Yelnick has urged caution about when the Big One will occur.  Longer term models have been pointing to 2004 for years.  Perhaps we see it this quarter, but more likely we are in a minor wave 1 of the Big One, which will be followed by a bit of a recovery into early 2004, before we all get swamped by the tsunami sometime in the upcoming primary season.  As a coincident indicator, Prechter's newsletter identifies a 44 week cycle in the dollar vs. the Euro, and it points to the next low at the end of Mar04.  Thus, there may be a financial crisis around Mar04 which could both drive the Dow down and drive the President out. 

impulsive decline

The sudden downdraft looks impulsive and broke the lower trendline since March.  This is very significant.  Possible the end of wave 2 *finally* happened.  More on this over the weekend.

 

The dollar is sinking and gold is rising.  The gold bugs are out in force.  Likely to be disappointed - the STU count marks gold as about to peak. 

 

Bush is plummeting and Hillary is rising.  The good general Wesley Clarke may be a stalking horse for her.  Next event to watch is the California recall of course.  It will show the mood of the electorate.  

Margin Mania

Alan Newman of Crosscurrents is an astute contriarian market analyst whose chart of the month is often an eye-opener. His most recent newsletter has a stunner in it: margin debt of investors at NASD firms (who make up the Nasdaq market makers) has shot beyond manic levels reached at the peak! A statistical glitch? Unlikely - the NASD has issued a warning about this. More likely "an abyss of intolerable risk" as Dr. Newman puts it. Seems like the stampeding herd jumped on the bandwagon just as the rapid market rise stalled in june and went into the summer trading range. Maybe they jumped in just as the ReFi game ended? You gotta give them credit!

Pullback or Trend Change?

Watching when the herd lift their collective heads up and sniff for lions in the grass (bears in the woods!) can be pretty funny.  Dollar has been dropping over 20% for two years, and a statement at the G7 meeting that the US wants more 'flexible' exchange rates wakes everyone up.  Oh!  Should we panic and run?

 

How significant was the stock and bond drop today?  The indexes have yet to end their final wave 5 wave action, and in particular retrace 78%.  Sometimes wave 5's truncate (end early), so we should watch the next few days.  The STU reports that the drop took us to the lower channel line for the past six months (back to March).  If we breach it -  Dow9381 and SP1008 - then the reversal is significant and signals continued weakness into the Nov11 date mentioned in a prior post.   If we bounce, as we should tomorrow, and go above the start of weakness - Dow 9686 and SP 1040 - then we continue up, as a corrective wave (wave 2 or wave B in a zigzag correction) cannot breach the beginning of the first wave. 

 

Fibonacci Ratios and Market Makers

Yelnick has been contemplating how fib ratos might develop in market indexes. Quick remarkable how often market movements shift at fibonacci ratios of each other. Prechter attibutes it to the fear & greed action of the limbic system in investors - since natural systems tend to show fib ratios in physical elements, he postulates it is also wired into behavior from the baser brain functions. It then gets realized in herd behavior. Zoran challenges this in the prior post, since small events or groups seem able to move markets ahead of the herd, and sometimes the herd is not able to turn the market.

Prechter attempts to answer this by suggesting that the herding instinct may cause a few to react before the herd, but react to the same underlying forces which later sway the rest, or fail to sway the rest. Could this explain the fib ratios?

Fib ratios occur not just in the classic fibonacci sequence (1 1 2 3 5 8 13 21 etc.) but in any summation series. Start with any two numbers and add them successively - the ratio between successive numbers trends to fib ratios (phi) very fast. This should also work with a sequence of mixed positive and negative numbers, although I have not seen anyone do this, since it is not intuitive. But it may reflect how markets move in fib ratios.

View the market as made up of groups of investors, all with different views at different times, some ahead and some behind. The behavior of these groups can be modeled as a sequence that sums or subtracts as time moves forward. A small group says X, and moves the market its way. A next group begins to agree with X, and piles on. Another group disagrees, and moves it the other way. These groups can be considered fib series whether they shift from positive to negative as long as they always 'sum' (make investment decisions in response to) the previous views. In this way the fib ratios emerge, whether there are positive or negative views. (I played a bit with a spreadsheet and it appears one can build a series of plus/minus fib series and sum them, and the result has fib ratios).

Possibly elliott behavior could be modeled using such mechanisms to attempt to derive the group opinions underlying the market. An advantage of this approach is not to see one 'market' or herd but to begin to understand the multiple market opinion groups or forces.

One could then see how a small group could create a wave 1, while the wave 2 swamps it as the groups which see the market the other way pile on to 'buy on dips' or 'sell on pops.' In the background yet other groups flip over to X's view and wave 3 emerges. All this needs is the time delay of opinion based on the actions of the other groups to result in fib ratios.

Zoran Teaches

Zoran Gayer is developing a modern version of Elliott wave theory, blending the orthodox Prechter view with the rival Neely view, and adding a better understand of chaos theory. He is attempting to solve the most bedeviling problem with ewaves, how to determine when a correction is ending. We have seen over the past year how Prechter's STU continually calls a premature end to this wave 2. For traders this is paramount, as placing positions at the end of a 2 to catch the 3 is where the money is made, at any fractal level of wave action. Here is part of Zoran's developing point of view:

EWP on the S&P 500 index 21
September 2003
(Excerpts)

I have read comments that this market is " climbing a wall of worry ". This is taken as indicative that this up move is a new BULL move. However, this statement is a contradiction the fact. How can you have a market "climbing a wall of worry" with optimism at the highest level since 1987 peak? This is not a "wall of worry" but more in line with exuberance of major tops and bubble mania.

The market comments are full of cliches that often are used out of context or times do not make any sense. Part of that is because our knowledge base has grown and that our view of the world has changed. Many of the market cliches we have inherited from the past and have been repeated so many times that they take form of market truths. Elliott formulated his concept over 50 years. Some things of Elliott's conceptualization may need revision. This not to detract from the man for his observational acumen was rare amongst men.

Let us consider three of his basic structural tenets.

Markets follow order

This is a basic tenet of Elliott Wave Theory as expressed by Elliott himself. Quoting from the introduction in Nature's Law Elliott says, "No truth meets more general acceptance and that the universe is rule by law. Without law it is self-evident there would be chaos, and where chaos is nothing is" and "But the market has its law, just as it is true of other things throughout the universe. Where there is no law, there would be no centre about which prices could be the resolve and, therefore, no market."

The statement is partly true and partly not. There is no question as Elliott puts it that there is law (or order). That there is law does not mean that the market always obeys the laws. Conceptually according to Elliott, the market is completely ordered and thus predictable. IT OBVIOUSLY IS NOT. It is much more correct to say,

"Markets are self ordering mechanism that constantly adjusts to an uncertain world".

The second statement in fact states markets are unpredictable. Thus, the concept markets are never the same, but they do rhyme is true. Modern research into the way natural systems behave is that small changes can produce vastly different results. In fact, though the rules are the same the outcomes can be vastly different. Substantially all natural systems move from chaos to order and back to chaos. The financial markets follow more the CHAOS THEORY than that they follow ELLIOTT'S COMPLETE ORDER CONCEPT. (There is a form of order in CHAOS/ FRACTUAL concepts, which seems contrarian to its name).

Crowd behavior moves markets

The crowds may move the markets but they are not the instigators of the trend they merely reactors to what has happened. The twelve men in the monthly meeting of the central bankers (FOMC) have more effect than rest of the crowd combined. History shows that individual men not crowds made the greatest changes. Most trends of human behavior grow from small beginnings. Crowds do very little than follow established trends.

In fact, a common indicator is that the crowd gets it wrong thus giving rise contrarian indicators. At market tops, the crowd is BULLISH and at market bottoms, they are BEARISH. Those that sell the tops and buy the bottoms are the market movers. The crowd does not create the mood its mood is a reaction to the market conditions. Greenspan and the central bankers have created the BUBBLE TOP not the crowd; they simply reacted to the created circumstances. Government policy, destruction law, actions from a small group politicians that started the IRAQI war affected the market to a far greater extend than any crowd ever could. How Elliotticians can conclude that the crowd moves markets is rather perplexing for it is so obviously wrong. Short- term crowds obviously do not move markets as it was amply demonstrated on the 6 June reversal. I suspect something like Peretos law applies to the markets where 20% of the participants have 80% of the effect.

Simplest market move

According to Elliott, the simplest market movement is five moves up and three moves up repeating in perpetuity. The direction is in the 5-wave thrust. It is a result from a LONG TERM to SHORT TERM approach. Ilya Prigogine suggested that all natural systems would move from one plateau to the next. The moves between the plateaus is fast and is directional - the order component. The plateau component is non-directional, thus CHAOTIC. To Ilya Prigogine natural systems rotate between order and chaos.

Each PLATAEU or NON- DIRECTIONAL movement resolves itself in a point, which Prigogine called a BIFURCATION . Thus, the simplest move in a natural system is from one BIFURCATION to the next making up the FRACTAL of chaos. Small changes at the BIFURCATION can cause an explosive move upwards or downwards and often this point is a fine balance. Because each bifurcation is a balance, the outcomes are unpredictable, for it can tip easily either way.

This is the very reason why Elliott is obvious after the event and nearly all Elliotticians get it wrong before the event .

One has only to read the newsletters of some Elliotticians to see that they have difficulties in accessing outcomes but then so has everyone else. Thus, long-term moves are made of many small term moves. This is opposite to Elliott and rather obvious. It also states that predicting the markets is a much more complex affair for at each bifurcation the market can head either of two ways. That does not mean that Elliott analysis is pointless. Since we know markets are SELF ORDER SEEKING mechanisms, it just means that we have to be flexible in our approach in reacting correctly to each BIFURCATIONS OUTCOMES. We also know from study of chaos that the same patterns appear in multiple timer frames. Thus by combining a multiple time frames in the analysis often, we can see the likely outcomes of BIFURCATIONS of a lesser degree. Each BIFURCATION will supply a possible trade in that fast move of order seeking attributes. THIS ALSO SUGGESTS THAT ELLIOTT ANALYSIS CANNOT BE DONE EFFECTIVELY WITHOUT USING MULTIPLE TIME FRAMES.

1987 Redux

The STU has backed off its call of Sep8 as the end of wave 2.  They still suggest a near term top, in the range of SP1045, or if that is breached SP1060 +/- 8 (on the Dow the equivalents are Dow9707 or Dow9745 +/- 12).  Give them time, they will come to the Yelnick view of a 78% retrace, and a test of Dow10K. 

 

Their timing seems optimistic as well.  Walter Bressert has tracked the most constent stock market cycle - the four-year cycle which is driven by US presidential election economic finagling - and predicts a cycle top in 1H04, with a most likely time of Mar04.  This is consistent with the Yelnick view, and would make for a very interesting election, since the top would be followed by fairly clear downtick that might lead to the ultimate Bear Market low in Oct04. 

 

The STU provides an alternate scenario, building on their analogy of today's bullishness to 1987's, before the crash.  They overlay the current wave 2 on the 1987 market, and find a fairly close match.  Now, waves are fractals, and patterns can be found like this without predictive value, especially as to timing.  That said, if we follow the timing of 1987, the most likely end of wave 2 would be literally at the 11th hour: Nov11, the 11th day of the 11th month.  If again timing holds, the 'crash' would ring in the new year and we'll all hit the bubbly, hard. 

Recall Wave 2!

The wave action today of a momentary move up and slip slidin' away in both Dow and S&P (and after a longer pop up, in the Nasdaq) increases the odds that Sep8 was the end of Wave 2 since last Oct.  We are now entering wave iii territory and should see a more impulsive down move.  Note that in '29 and '87 the crashes happened the first trading day following a fibonacci 55 calendar days after the market topped.  Odd coincidence.  This might suggest an interesting market around Nov3.  Yelnick points this out not to make any prediction but to point out a possible serendipity. The California recall was momentarily postponed by the Ninth Circuit in what the conservative talk show hosts are seeing as judicial payback for the court-decided 2000 election.  While the Supreme Court may overrule the decision, it is also possible the recall will be moved to the more normal election time of the first Tuesday in November - Nov4!  Gray Davis's momentary victory may be Phyrric. 

The Oracle Speaks

The WSJ ran two upbeat stories Friday, one on economists predicting the strongest growth in Q4 since 1999, and the other on anticipation that Oracle's after-hours earnings announcement would show solidifying business software sales.  The two are connected, as the economist are expecting business spending to begin to pick up, sustaining the economy as consumer spending begins to abate.  What did the Oracle reveal?  While Oracle hit its earnings target, it fell short of its license sales target.  So while there is an underground belief in the IT community that CIOs are beefing up IT budgets for 2004, in 2003 there still is no evidence of increased enterprise software sales, and in general no evidence of increased business spending on IT. 

Are We There yet?

STU called a possible top for wave 2 at Monday's highs. The wave action Tues and Wed was a clear five-wave impulse down, and the action Thu and Fri (today) has been sloppy and corrective. Accordingly, supports the case for a change in trend. But is this THE top? Not yet clear. Monday should be down at the open, or if not, down sharply Tues and Wed.

False breakout

Larry Katz has updated his e-wave forecast here.  Larry is a very good tech analyst and looks at a variety of indicators to cross-correlate where we are in the wave pattern.  As the summer trading range developed, he projected one of two outcomes: (1) another up move of the magnitude of Mar-Jun (bullish), or (2) a false breakout and then serious drop, much like the summer of '98 (bearish).  Now that the summer pattern has resolved into a fourth wave triangle, he is firmer in his forecast: the bearish false breakout.  Triangles are ending patterns, 'penultimate' waves as he says (the one before the last), and presage a final wave five before the Big One down.  This is consistent with the Yelnick view, and (except for timing) the STU view. 

 

Optimism at the Peak

A loyal Yelnick reader and sometime (but always constructive) critic commented on how optimistic the Silicon Valley Tea Leaves had become - was Yelnick becoming a bull? Yelnick calls them as he sees them, so if optimism is afoot, it will be reported. But before you delight in such a turnaround, I must add that
optimism is what a bear would expect in a wave 2. One can get a good read on where we are in the wave count by the indicia of social mood that surround the indices of markets. If this were a beginning of a new bull market - a wave 1 up - it would be filled with doom and gloom. Bull markets need to climb their wall of worry. The rampant optimism that surrounds this move since March are much more consistent with a fack breakout wave 2.

And this wave 2 may be cresting. The STU reports that certain indices hit their target ranges today, so today could be the day. Also, this weekend marks a fib turn date, so a couple more days of topping action, plus the Dow cresting higher, would make this call more likely. The VIX is at its lowest since the wave 2 peak in Sep00. The "Bullish Consensus" group sees bullishness at a peak for this whole bear market. And so on. the technical indicators continue to look manic. Look for a sharp downtick at the peak, marking the peak.

Redneck Greenspan

Zoran forwarded to Yelnick a translation of the Jackson Hole speech by Greenspan.  For those of you who have listened to Greenspan speak, or God forbid read one of his speeches, you realize he speaks with multisyllabic obscurity for a reason - if the mysterious ways of the financial priesthood were to become widely known, it would move markets against their wishes. 

 

Consequently, when some wit translated Greenspan's latest into the vernacular, it came with a clarity he doubtlessly did not intend.  You can read the redneck version below. 

 

For those of you with even shorter attention spans, John Mauldin has drawn the core implications from the speech in his piece Greenspan's Uncertainty Principle. 

 

For those of you with attention deficit disorder, let me do the abridged version of John's piece:

Greenspan's opens with:  "Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape."  Thus, econometric modeling is insufficient to predict future market behavior.  (This from one of the prime econometricians prior to his ascension to the Fed chairmanship.)  To fill in the gaps, the Fed has begun looking at behavior models and history, or as greenspan puts it: "inference of how market participants might respond to a monetary policy initiative may need to reference past behavior during a period only roughly comparable to the current situation."  The Fed has applied this historical view in its focus on deflation: "These considerations have inclined Federal Reserve policymakers toward policies that limit the risk of deflation even though the baseline forecasts from most conventional models would not project such an event." 

For those of you with no attention span, bottom line is:  they are coming to the Elliott worldview that social mood and behavior are more important considerations than the fundamentals of money supply, fiscal policy, and interest rates. 

 

Redneck translation of Greenspan's speech 

 

We are in deep doo doo boys and girls!

We did our best, but our best wasn’t good enough. We know what the key economic relationships are, but don’t know completely how they all interface with one another…and as the global economy continues to expand exponentially, our understanding of the intricacies of these relationships fall exponentially behind. In other words, it is kind of like having a front row seat in a train wreck. We can clearly see we are in trouble, but simply don’t know what to do about it.

Our economic models aren’t worth a crap, when the geopolitical shit hits the fan. We can control monetary SUPPLY, but we don’t have ANY control over monetary DEMAND.

Consumers, by extracting equity out of their mortgages to be used for cruises, trips abroad, his and hers SUVs, charge accounts at Macys…are the only thing keepin’ this economic train on the tracks…and one by one these consumers are either losin’ their jobs or hearing about someone else losin’ theirs…and they are beginning to tighten their money belts. We may not be able to count on ‘em for much longer ‘cause mortgage interest rates are headin’ higher and that will sure as hell kill the last remaining economic bubble as these patriotic consumers see the value of their homes drop 30 to 40 percent just after they secured a mortgage for 120% of the value of the home and just before the ‘wealth effect’ rug gets jerked out from under them. Oh boy, they will be pullin’ their little economic wagons in a circle and I don’t mean maybe.

It is all a WAG (Wild Ass Guess) so we might as well LOOK confident even if we don’t have a clue about how the real world works. It is not what you do that counts, but how you look doin’ it. It is getting awful close to election time boys, and we better get our act together quick…either that or we better get the hell outta dodge. Since we don’t have any real control over this train wreck, let’s just quietly go for the ride, look as dignified as possible, and make sure the first aid kit is handy…cause it sure looks like it is gonna be a doozy of a wreck just up ahead.

We’ve been working toward economic globalization thingee for the last 50 years and finally it has arrived. The downside of economic globalization is that when one domino falls…the whole kit and caboodle goes along with it…kinda like the Black Out we had on the East Coast a few weeks ago.

We came close to losing it in 1979, the dollar was getting dumped and we raised interest rates to da moon and just barely salvaged it. If our Arab friends had been more liquid in their U.S. investment holdings and had been more successful in unloading them quicker, we probably wouldn’t be having this conversation right now. Since we are pissing off our Arab friends on a continuing basis of late and since they are also a lot more liquid in their investment holdings today than they were then…we may not be able to deal with it as effectively this time around. They learned their lesson with Carter, and the presidents who followed him, who reacted desperately and froze foreign assets held in the U.S. of those countries ‘suspected’ as being responsible for acts of terrorism. If they get wind of anything like that in the future…we would have to raise interest rates to 40 or 50 per cent or higher with no certainty of keepin’ this baby on the tracks. Whooh! 1979 was a very close one. And don’t forget the Chinese…how many of our dollars are they holding onto? …waiting for just the right moment to dump ‘em on us…whoowee…I hope I’m retired when that happens.

Hey folks, this economic juggling act is getting a little wearisome…I don’t know how much longer we can keep these economic balls in the air…so maybe we oughta quit tryin’ so hard. Maybe we oughta just lower the bar a bit before we drop ‘em all and look like a bunch of buffoons.

The bottom line is this…we simply don’t know what the hell we are doing and our economic models no longer represent reality, so we are simply going to wing it and react to situations as they arise…and carry lots of bandaids…and pray we won’t need the splints.

Our flawed economic rules got us in the mess we are in today and it is doubtful their continued use will successfully extricate us from the disaster ahead…so we are going to consult soothsayers and palm readers…and then make the best guess we can.

If you pseudo economic geniuses think you have a better plan, I’m all ears. And if we don’t come up with sumpin’ good and real soon…we all are gonna be history.

Is Oz Showing the Yellow Brick Road?

Zoran reports that the Australian index, the SPI, appears to have topped last week.  Occasionally the SPI presages to S&P.  More support for the STU view that the top may come early this week.  if so, it creates one of the great shorting opportunities of our lifetime.  Yelnick has commented that one way to play the ewave analysis is wait for the end of wave 2 before taking a position.  We may be there, and what *should* follow is the Big One. 

Bullish Sentiment Hits '87 Extremes

The STU also reports that bullishness among investment advisors continues to rise and is hitting levels not seen until just before the '87 crash. Also, insiders are selling $44 for every $1 they buy, a level last seen right before the 28% drop in the S&P into the Sep01 low. This is what to expect at the end of a wave 2.

Wave 2 End *May* Be Nigh

One down day, and the STU sees the end of wave 2 is just a few days away. Recall that we are in wave C of 2 since the Mar03 low. Wave C is breaking out into a five wave pattern, which is expected. The first 4 waves have already occurred, with the summer trading range since Jun17 representing a wave iv triangle. We are now in the final wave v. This wave v has subdivided into its own five-wave pattern, and a reasonable count could put us in subwave v of v. If so, it may top early next week.

STU says to watch S&P closely, If it breaks SP1000 to the downside, it marks the end of wave v and therefore the whole wave 2. if it breaks SP1040 to the upside, it should continue both higher and longer towards the 78% retracement level.

If Yelnick sounds a bit skeptical, recall that Prechter called the top all the way up from Dow3600 to Dow4200 to Dow5400 before giving up and letting the puppy run to its manic peak. The STU often gets aggressively bearish when given the chance, based on its longer term view of the state of the market. If the market were to top next week, it would not have retraced to the 78% level but to a lower, non-fib level. Yelnick recommends - watch closely next week for the reversal, but expect this market to run a bit longer and higher.

Silicon Valley Tea Leaves: Q2 VC Survey - Clear Improvement

Fenwick & West publishes a quarterly VC survey whose conclusion for Q2 provides support for a rebound in VC, including (most telling) an increase in valuations. Deals in the hotter spaces (social software for example) report VCs cold-calling to get in. We could see a remarkable switch in a short time from a buyers market to a sellers market. The Fenwick report's conclusion reads:

Conclusion ? The terms of venture financings improved somewhat in the second quarter of 2003. The percentage of financings that were down rounds decreased (although we note that a majority of financings were still down), the percentage of Series A financings increased, and the other terms of financings were generally less tough than in Q1 ?03.

Consistent with this trend, we note that various industry publications have also reported an improvement in the venture financing environment, showing an average 7% increase in the number of financings from Q1 to Q2 ?03 and an average 10% increase in the amounts invested over the same period.

Lastly we note that Nasdaq increased approximately 20% in the second quarter of 2003. To the extent this trend continues we would expect venture terms to continue to improve.

The Fragile Wave 2

The STU has now more fully joined the Yelnick view that we remain in a Wave 2 which will retrace 78% of the Wave 1 down since mar02, just as the two prior wave 2's in the Dow both retraced that far. Normally wave 2s retrace 61.8%, but these aren't normal times, and the extreme retracement recapitulates the extreme heights of the mania.

A number of pundits expect a poor Sep/Oct but they may be disappointed. The impact of all the steps to revitalize the economy are still rolling through. Although mortgage rates peaked in June, house closings continue at a high pace as people rush to grab the rates before they rise farther. This appears to now be slackening, but still shows up in the statistics. Although the massive dividend tax cut is one of the poorest designed cuts imaginable to revitalize the economy, since it mostly shuffles where capital sits rather than incents new capital investment, to the extent it is putting increased spending power in people's hands, it is doing so now and into the end of the year. Although the increased war spending was largely spent in Q2, war spending remains at a disturbingly high level (imperial overreach anyone?) and will appear in GDP statistics in Q3 as well as Q2.

Best view I have heard on our current state is a 'fragile recovery' which could be upset at any moment, given an adventuresome Prez, a large debt overhang, and a continued dour social mood.

Watch the wave 2 meander up towards the 78% retracement level of Dow9930. We may see the Dow bouncing off the 10K level in Sep and even Oct before the confluence of events and news upsets the fragile recovery.

Silicon Valley Tea Leaves; Get Ready for the Rebound!

A flurry of articles and activities show the growing optimism in the Valley. The WSJ had two articles, summmarized in Corante (the online WSJ requires paid subscription) as follows:

Bets are on again - Wall Street Journal (sub req)
The Wall Street Journal reports that the VC firms of Sand Hill Road are starting to poke around hot technology sectors for new deals. Investments in early-stage companies were up 43% in 2Q 2003, and rumors abound of start-up companies receiving multiple term sheets. As one VC explains, "If you look up, you only see scarred pines, devastation and you miss the point. If you look down, there's a profusion of damned near everything growing out of the ground." Seasoned investors note that a number of factors are responsible for the mini-turnaround in the VC industry, such as the stabilization of the IPO market for VC-backed firms.

Now a seminar request comes across my desktop: "Get Ready for the Rebound! With the economy showing signs of life, smart companies are starting to make major strategic changes in order to best position themselves for the rebound. What should YOUR company be doing to get ahead in the next business cycle?"

From a ewave point of view, we are in a wave 2, and optimism reigns at the end of a wave 2. Anecodal evidence continues to point to VCs going back to business, valuations beginning to rise, etc. - all signs of a rebound in formation. What to believe? Best to watch the other signs of whether this is still a wave 2 with a downturn to follow, or the beginning of the next move up.