Planet Yelnick

Beware the Nones of November

As we track the Decline and Fall of the Greenspan Empire (aka The Greatest Asset Mania of All Time), the timing of the elusive Wave 2 top is the next big thing.  We all know the Ides of March is mid-month.  Less known is another day in the Roman calendar, the Nones, which in November is Nov5.  The STU today sharpened their forecast for the top to the Nones of November: a top around Nov4 - Nov6, with Nov 5 as most likely.  This date comes from several angles, but primarily they recalculated their mapping of the 1987 market pre-crash to the 2003 market, and found they had been off by four trading days, so on a trading day basis, they pulled back their original Nov11 prediction to Nov6; and on a calendar day basis, they similarly came to Nov4.  Beware! 

 

A bit of a gutsy call, given the 7% GDP growth announcement today, and continuing ebullient optimism.  Maybe the Ghosts of Crashes Past visited them this Halloween, and gave their prescient third eye a 'peak' ahead. 

 

Timing is the elusive part of Elliott Wave, but wave height and pattern is not.  Under the STU count, the Dow should not breach 10116, or their count is off; and if it breaches 9500, the drop is in. 

Prechter's New Count, Same Message

Yelnick has noted that Prechter has hinted at changing his count in recent newsletters.  Today he unveiled his new count.  The count may be different, but the message is the same, and the prediction is much closer to Yelnick's view: a top of around Dow10K at around Nov 11.

 

Prechter had counted the Dow since Jan00 as a nested series of waves 1 - 2, so that we were nearing the 3 of (3) of [3] wave.  This is what normally happens.  However, the recent wave 2 of (3) of [3] has proceeded longer and higher than should have been expected of a wave 2 of third degree down.  In particular, it had passed the normal 61.8% retracement and was heading for a 78% retracement, as had the prior wave (2) and wave [2].  While explainable by the unusual circumstances of the mania, it nevertheless is rare for wave 2's to retrace that far, let alone three times in a row. 

 

A simpler way to count the bear market would be to see the whole drop to Oct02 as wave [1] down.  Zoran had moved to that view a while ago.  Yelnick had suggested that view in informal communications.  Now Prechter has found the systematic justification for that view. 

 

The best reason for this change is the psychology of the current wave we are in, which is now relabeled as wave [2].  The investment climate has been uber-bullish, as expected in a wave 2.  Wave 2's are often more bullish than the peak of the bull since investors are convinced that they have caught the bottom, so feel they have deeper justification for their bullishness.  The level of bullishness now is higher than in the prior waves [2] and (2), which suggests that THIS is the highest degree wave [2], not the previous ones. 

 

Under this new count, we look for a 61.8% retracement of the full wave [1] down from the peak.  The former Yelnick target was 78% of the wave 1 of (3) of [3] down, or Dow9930.  The new ideal target is essentially the same, since whole drop of the new wave [1] is full of fibonacci relationships.  (78% is the square root of 61.8%, so since the prior wave 2's each retraced 78%, it should be no surprise that 61.8% of the whole drop calculates out as 78% of the most recent drop.)  Suffice to say the target is Dow10K +/- 200 points. 

 

Dow 10K is also a major psychological barrier.  When the Dow first broke 100, it took another 18 years (and the Roaring '20s) to go above it again.  When the Dow first broke 1000, it bounced off it a few times but didn't break through for another 16 years.  It should be no surprise if we slightly break through the 10K level and then turn south again.   

 

Timing for the top is anywhere from Oct15, the day Zoran has already called as the top, to Nov 14, with a most likely time around the first full weekend in Nov, or Fri Nov 7 through Tues Nov 11. 

 

Yelnick sees Nov11 as one of two likely times for the top.  Besides the above analysis of Prechter, Nov11 also fits the pattern the market saw in 1987.  If the 1987 model continues, it would point to a crash the first week of Jan04.  The other likely time for the top would be in late-Mar/early-Apr04, reflecting the impact of the Presidential four-year cycle on the timing of this wave [2].  To put it in simpler terms, Bush and Greenspan are doing everything possible to pump the economy and get re-elected.  Their manipulations will either have worked or not worked by the end of the first quarter, right smack dab in the middle of the primary season.  These manipulations have the effect of extending the timing of the wave, but not affecting its height or overall pattern. 

Financial Reckoning Day

The markets have gone south since Zoran's call of a top on Oct 15.  Is this it, or will there be the final pop up to the Yelnick 78% retracement of just under Dow10k?  So far the drop has been impulsive, which supports the case for an Oct15 top.  The market will now retrace in a little wave 2.  If it goes above Dow9773, it is likely it will continue to a higher top and test Dow10k.  Too early to make a definitive call. 

 

For a longer term perspective, we turn to the delightfully iconoclastic The Daily Reckoning, which laid bare the contrarian case this week:

 

We are almost past October - does this mean the seasonal uptick (stocks tend to rise from Nov to Mar) is upon us?  (Yelnick notes that the seasonal uptick has not been working since 2000.)  As they put it:

While "[t]he month of October can be a cruel one for investors. The other months that can be cruel are January, February, March, April, May, June, July, August, September, November and December. "

Why the jobless recovery?  Is it due to the magic of productivity?  (Yelnick believes it is due to the distinctly unmagical overcapacity in world production - little noted is that even in China, manufacturing jobs have declined recently.)  No, they attribute it to the wizardry of credit:

"While stimulating the U.S. consumer to buy things, neither the Fed nor the Bush Administration could make him want to buy things made in America.  Instead, he shopped for bargains and found them overseas."

Is tech leading us out?  They note with delight the Gilder factor - George Gider was the guru of the bubble, with his breezy predictions of a telecosmic future, and after a long hiatus amidst the Telecom Nuclear Winter, he is now back in vogue!   They even re-read his book, to see if they could find evidence of his bold new future.  Instead, they found evidence abounds for the telecosm to again be a financial black hole:

"We see evidence that 'Financial Reckoning Day' is right on target. As the Mogambo Guru points out ... : 'S&P stocks are selling at 33 times earnings. Nasdaq 100 stocks are selling, by one estimate, at 8 times SALES, and by another estimate for a P/E of 233. Houses are selling at over three times median income. Private household debt is financing 20% of GDP, and the debt is at record levels, both absolute and relative, in all of American history. Interest income has been slashed to negative real returns. Government deficit spending is exploding.' "

Is the end nigh?  I leave you with a quote from Dr. Deficit, or "How I Learned to Stop Worrying and Love the Crash" himself, John Maynard Keynes:

"The market can remain irrational longer than you can remain solvent."

Zoran Calls the Top

Zoran has issued an update which is very worth reading. The DOW-An EWP view-19 October-2003.pdf Calls for a top last week on Oct15. This coming week will tell how prescient this is.

Zoran uses a different count than Prechter's (which is orthodox Elliott). Yelnick has promoted this count for several years also:
> Prechter has wave IV bottom in 1932, Zoran and Yelnick say 1949
> Prechter has wave 4 of V bottom in 1974, Zoran and Yelnick say 1982 (and it is a wave 2 not 4!)

(On an inflation-adjusted Dow, Prechter agrees with these counts.)

Implications are:
> 2000 wasn't the 5 of 5 of V and the end of civilization as we know it, but the end of 3 of V
> We are in a wave 4 of V, and there is a new bull market wave 5 of V ahead, but wave 4 isn't over yet

Where Yelnick and Zoran differ is, Zoran thinks the end of what Yelnick has been calling wave 2 is actually the end of the bull market from 1982, and the end of wave 3 of V from 1949 .. Yelnick would have those all end in 2000, with the action down into last Oct02 (or Mar03) being the wave 1 down, and the recent uptick being the wave 2 back. But these count differences matter little, as we both agree that the next stage is down and down hard, and agree that the Dow will retrace the start of the mania (Dow3600 in 1994) to end this wave 4 before wave 5 of V starts.

Prechter Triangulates

Prechter's EWT today used the C word (crash).  He sees the market nearing the end of a rare expanding wedge or diagonal triangle, which is always an ending formation.  As a consequence, he sees the odds of a rapid decline or massacre in November as the market catches up (or should we say down) to reality.  Crashes are rare events, so view this prediction as unlikely; but the extreme P/E ratios and other indicators of an overbought situation call for a severe catch-up event.  Perhaps the Yelnick view of a touch of the 78% retracement (Dow9930) followed by the severe altitude adjustment around Nov11 is coming.  The adjustment might happen in two phases - a preliminary jitter down in November, and an historic drop in Mar/April.  More on this as it unfolds. 

Silicon Valley Tea Leaves: VC Funding Hits Pre-Bubble Level

Corante reports this story from Investor’s Business Daily: 

Mark Jensen, national director of VC services at Deloitte & Touche, weighs in on the current state of the U.S. venture capital industry. While the industry is "still recovering from whiplash," VC funding has apparently returned back to its pre-boom levels: in 1996, the VC industry invested $10 billion; in 2003, the VC industry will invest close to $15 billion. Jensen discusses "hot" areas for VC investment, the role of the VC industry in "feeding" the dot-com bubble, and positive trends emerging for technology investors. Some parting thoughts: "A downturn can be good for innovation… A lot of the real success stories in the tech industry came about during times that were worse than they are now." http://www.corante.com/venture/redir/31165.html

Can Govt Stats be Trusted?

This disturbing report from Merrill Lynch, sent in by a loyal Yelnick reader:  that recent GDP figures assume a much larger increase in tech spending than other sources support.  This on top of the head-fake employment numbers a week ago, where the Labor Dept reported an increase, but the fine print showed they had removed a much larger number from previous reports, so they were able to claim an increase when their own numbers showed a decrease! 

Silicon Valley Tea Leaves: Seller's Market?

Fortune reported more tech optimism today.  In addition, in a remarkably quick turnaround, the VCs now seem starved for deal flow.  ("What ye shall sow, so ye shall reap").  In the last few weeks a stack of 'social networking' companies - Friendster, LinkedIn, Tribe - got funded at higher than recent A round valuations.  More significantly, they were chased by VCs wishing to get in on the action.  Haven't seen that since late 1999. 

to B or not 2 be

Wave action suggests higher highs ahead.  We appear back to the march towards the 78% tretracement level of Dow9930, and therefore back towards a turn date of around 11/11.  Also, Prechter has hinted in his last two Theorists that he might rejigger the count from wave 2 of (3) of [3] down, to wave B after a wave A down into last October.  Wave B's behave like wave 2's except can go much higher before the wave C starts. 

Scandal Candidate: Cheney and UA93

Scandal Candidate: Cheney and UA93
Yelnick said: "Prechter has gone out on his limb, and predicted that Bush too will be brought down by some scandal, yet to emerge, for actions already taken." My scandal candidate: The fact (reported by Dan Balz and Bob Woodward in the WaPo) that Cheney ordered and then confirmed the order to shoot down UA93 on 9/11, and the suspicion-bordering-on-fact that the Air Force carried out this order, followed by a cover-up. Reason for the cover-up: a) GW wasn't in the decision loop (he wasn't even on the phone!), and his 9/12 public image couldn't have taken the hit. b) "The Vice President killing Americans" (even if it was the right thing to do... it was...) complicated the spin of "bad guys killing Americans," and this is an administration driven by spin.

Also note that while "conspiracies" (before the fact) are exceedingly rare, "cover-ups" (after the fact) are depressingly common... I believe in the latter, hardly ever in the former. The electorate has said it doesn't care about crony capitalism, but it does care about 9/11. Scandals which bring down presidents need to go to the source of their strength.

Rush, to Judgement

Bear markets bring down the stock market icons of the prior Bull.  Martha Stewart, Frank Quattrone.  The grizzler bears begin to mawl the icons of the prior era outside of the financial arena.  This one seem to be about to knock Rush Limbaugh off his perch.  Prechter has gone out on his limb, and predicted that Bush too will be brought down by some scandal, yet to emerge, for actions already taken.  Bush's Watergate. 

 

Current candidate: the incredibly irresponsible behavior of Vice President Dick Cheney, still receiving stock options and deferred compensation from Haliburton, and the apparent favoratism shown Haliburton in Iraq reconstruction. 

 

Crony capitalism of this magnitude - and it may be just the tip of a deeper iceberg - deserves to be outed then dismantled.  Bush may have gone to war to fix a problem left by his dad, but the cronies around him may truly have gone to war for oil, to feather the nests of their prime consituents, oil and oil service companies like Haliburton. 

Cautionary Note

The markets went through the 62% retracement level, and shot above the 78% level, but didn't break the Sep19 highs before reversing at the close on Friday.  Technically a wave 2 has to break the start of wave 1 to change the count, but *usually* when it passes 78% it keeps going.  Zoran's weekend update points out that the market shot up on Friday on good employment news, then turned around when late in the day a little-noticed addenda to that news poured cold water on it.  Also little noticed in the financial news was that interest rates turned up, normally a bearish sign.  Prechter also sent out his EWT this weekend, a bit early - but he normally does this when he feels the need to keep the faithful in line.  (His primary point: cycles suggest relentless downside pressure into the end of 2004.)

 

Monday is Yom Kippur, and our Chinese Curse Day.  The STU pointed out the stock market adage to 'buy on Rosh Hashanah and sell on Yom Kippur."  Trading should be light on Monday, so we won't get a real read on this until Tues. 

Chinese Curse Day

What happened in the last two days is that the little wave [i] down extended in its subwave 5 to a lower low, and today we have begun what should be an ABC pattern back up in little wave [ii].  The Nasdaq is lagging, so watch it to spurt up.  The 61.8% retracement is SP1020 or Dow9500, and the 78% retracement is SP1030, Dow9570.  If it goes above the Sep19 highs, something else is going on.  When it goes below Dow9000, it confirms a wave 3 has started with a vengeance. 

 

While in terms of price this rally is almost there, in terms of time it would normally last into tomorrow to next Monday.

 

Mon Oct6 is a Chinese Curse ('may you live in interesting times') Day - Yom Kippur and the 30th anniversary of the 1973 attack on Israel.  Rumors abound of some event that day - maybe an Iranian nuke is tested, maybe North Korea tests as well.  The day after is the California Recall, and the most recent polls show that the recall is gaining momentum into its final weekend.  Both Davis and the markets may take a tumble that day.  If the nuke rumors are true, Yelnick wonders if Humpty Dumpty (Bush) will ever be put back together again.