Planet Yelnick

Interim Report - The Top is In, Again!

Prechter sent out an interim report saying that the interim top is really in, really.  He had sent an earlier interim report before the election which called a top then or after a final 2.7% move up.  The final move up has happened. 

His count remains: wave [1] down <2000W1> in Oct02, wave [2] top <2000W2> in Feb04, subwave 1 bottom <04W1> in Aug, subwave 2 top <04W2> just in.  So we have a nested series of waves 1 and 2, which like a coiled spring usually precedes a deeper wave 3 drop down. 

What makes Prechter so confident is that the wave [2] in Feb04 fits his theory very well in time, pattern and level.  In addition, there is an unbelievable level of bullishness right now, getting more lopsided every day.  This is typical of a wave 2 top.  As explained previously, after a big drop off a peak (wave 1 down), the wave 2 reversal up tends to be more bullish than at the prior peak, since this time the traders really believe they caught the bottom, whereas before they were running on momentum (greed is fear of falling behind, to a trader); therefore they are more confirmed in their speculative fervor.  In contrast, the beginning of a bull market tends to start from a lopsided bearish position.  The bullishness today rivals that of 1987.  One new indicator is that the net long position of hedge funds is at the levels seen in 2001 just before the Dow fell 3000 points. 

Zoran also sees a fall coming.  His Bifurcation Theory, however, usually calls for a triple top before a deep drop.  In the past week we have had two thrusts of the Dow above 10546, the 2.7% more level.  We might see one more attempt to get near Dow10600 before the tide truly turns.  This possibility is also entertained by Prechter. 

Virtually all markets have been moving in tandem to this extreme bullishness.  Dollar weakness may be about to cause a serious spike in US interest rates - treasuries gapped down a few days ago.  Thus we may get a multi-month rally in the Dollar and an increase in long-term rates, as part of a general downturn in markets worldwide. 

The lead article in Business Week is how China has a 30% cost advantage across the board.  The implication is that the Yuan needs to be revalued upwards by 30%.  Obviously China is the new Japan (ala fears of the inevitable Japanese dreadnought in 1987).  One can see how Greenspan and Bush are playing chicken with the Dollar - trying to force China to revalue at the same time driving the Euro to uncompetitive heights.  It would make their hand stronger if the US savings rate were higher and the deficit lower, meaning less need to borrow abroad.  While the US has tremendous reserve borrowing power, the sand is now in the gears and we may have a denouement one way or the other shortly.

All That Glitters ...

The gold bugs are out in force.  Greenspan's statement this morning that foreign buyers are leaving the Dollar (not a surprise to Yelnick readers) spooked the stock market and led to clamors for Dollar decline and Gold incline.  Also, a new exchange-trading fund called GLD IPOed today (GLD = gold).  The Safehaven.com forums were aglow with cries for buying gold and calls of a second leg to the gold bull market.  More generally, some pundits are saying to fasten the seatbelts: "The US trade deficit is a virtual guarantee that the dollar will fall and the budget deficit is a guarantee that interest rates will rise. It’s busy happening, and there is no end in sight. " 

When the herd bleats about a trend, it is usually about to reverse.  The STU agrees, and sees an end to Dollar decline and a coming drop in Gold (although it may rally a bit longer first).  In addition, the very gold rush fever that caused the GLD fund to be launched has already been raging for months and is more likely to be abating as GLD finally gets going.   Has anyone noticed that the Dollar had been dropping for 30 months, and has fallen 30%, and only NOW does Greenspan make a statement?  What took him so long? 

What should be more alarming than finally recognizing a 30-month trend is the rise of bullish sentiment to levels higher than those seen near the tops in 1987, 1972 and 1929.  A sharp stock market drop will cause a short-term shift of assets back into safer investments, such as Treasuries, rallying the Dollar. 

Expect a stock pullback followed by a year-end stock rally, and an imminent rally in the Dollar.  If the goldbugs and doomsayers are correct, however, and the Dollar does not bottom,  we may have finally hit the final Marker of the Fall that could mean a much steeper stock market decline and no Stock Market Santa this Christmas.

Time For A Pullback

Market has good momentum, and most market pundits plus some e-wave analysts think it will continue this week.  That usually means it will confound them and do the opposite.  Prechter's STU gave a number of reasons for a near term reversal this week, including Monday/Tuesday being the end of a Fibonacci time window.  Zoran tends to agree, as does Fibonacciman.  Joe Duarte as usual gives a detailed assessment and says to watch this coming week: the market is past its election euphoria and now is watching the Fed.  Greenspan gave some pessimistic remarks this weekend about the deficit.  In itself this seldom means much as the deficit is in the future and the traders live in the present, but the market watches for hints of Fed moves.  The Dollar is continuing to slide, and rumors abound that China will move from a Dollar Reserve to a Basket-of-Currencies Reserve.  Yelnick's view is that we should see some pullback before Thanksgiving (two weeks away), followed by a rally into the end of the year. The denouement, whatever it is, will likely wait until the new year.

Post Election Wave Count

Yelnick had expected the markets would run up anticipating the Bush victory and sell off after.  Instead, they ran up somewhat in advance, and have rallied on his re-election, as the conventional wisdom expected.  Sometimes the CW is right!  This was apparent election day morning, as the markets rallied then sold off when the the bloggers leaked exit polls showing Kerry strength in battleground States.  As we now know, the exit polls were off, as they were also off in 2000.  But the polls themselves were spot on - the election eve average of all national polls had Bush ahead by 2%, close to his 3% victory margin.  Sometimes the polls are right!

Yelnick had also expected that the winner would win in a stronger showing - either Bush in a walkover or the challenger in a rush to kick out a failed President.  This prediction was based on both historical analysis (eg. Nixon landslide in 1972 amidst a polarizing war and mixed economic results) and Prechter's expectation of a Bush defeat due to a wave 3 down to much lower levels.  We never got the wave 3, and Prechter sent out his own mea culpa interim bulletin yesterday. 

Prechter still expects a wave 3 in the 2d Bush term, and believes the Repubs will regret this win as the country's mood will switch to negative, and will search for a strong leader to pull us out of a deep mess - Hillary in 2008. Yelnick disagrees with Prechter on this.  We are in or coming out of a wave 4 correction of the bubble (as explained previously in this blog site) and a wave 5 will follow.  We might even see a new bubble into 2008, since this wave 5 is likely to exceed the peaks in 2000 (yes, even the Nasdaq, hard as that may seem - wave 5's sometimes truncate, but there are economic forces which suggest in this case upside will be surprising).  More on this in a subsequent post.  Suffice to say the country has moved right and Hillary is pinned to the left; she is not the candidate to bring the Demo's back to power.  More on that in a subsequent post.

Back to the election - the surprising part in retrospect is how close it was.  Given the relatively benign economic situation - deficits may matter but they are a future worry - Bush should have won handily.  It appeared he would have before the first debate.  In retrospect, he made a mistake to debate at all, since he elevated Kerry to his stature, and Kerry almost equalized the race. 

The wave count two months ago had expected a final rally to Dow10407, but never reached that level until today. Prechter and other ewavers in retrospect were too anxious in calling for an end to the little wave 2 that we are in, and too ready to announce the beginning of wave 3 down.  The start of this wave 3 into the election did not look impulsive, however, but corrective/overlapping.  Prechter tried to count it as a nested series of 1's and 2's of lessening degree, but this election rally blows that count out.  Instead, we are in an ABC flat wave 2, and may go as high as Dow10546 (78% retrace) or even Dow10646 (where A = C).  Or we may have topped today. Next week has a possible turn window at the end of the week, so watch that.

If these levels are breached, then we ended wave 4 in Mar03 and are in wave 5 already.

Going forward, Prechter expects a repeat of 1972: markets rallied after Nixon's re-election, then turned in December into the sickening drop that got Nixon thrown out of office and gave the markets their worse loss since 1929-32.  In the short run, a reversal next week will go into Thanksgiving and be followed by the beloved Christmas rally.  Then we shall see if the ghost of Nixon past will haunt this market.