Planet Yelnick

The Next In Turn Dates

There is a really poor joke about who is almost a doctor? The next intern, of course. In our world, the touted Turn Date of Feb16 turned out to be a bit of a poor joke as well. Yes, the markets turned, but then came back. Even the groundhog made a better prediction than this - he saw his shadow, which means six more weeks of winter, and today it is snowing in New York City.

What is almost a good prediction? The next Turn Date, of course. That is Mar1 +/- a few days, which means it started today and continues through this week. On cue, the markets dropped today. The STU, which pronounced this turn date, calls the market move inconclusive. They expect a down pattern over this week but do not yet see the wave signs for a major turn. Check in Wed for an update.

If this second turn date is but another short term drop, we may need to wait for the next date in turn: Mar16. But wait, there is more - yet another turn date analysis, captured in this chart, courtesy of Ron Greiss of The Chart Store, which looks for a mirror pattern of the S&P on the way up since Mar03 with the way down from the peak in Mar00.  (Click the chart to see it full sized.)

The World is Awash in Liquidity

The Dollar drop Monday spooked the equity markets Tuesday. Today a bit of a bounce. What is overlooked is that the long bond remains cheap, despite Greenspan's jawboning and his raising of short term rates. One would think the dropping Dollar would need to be offset by higher long-bond rates, to attract creditors back to the Dollar. Instead, as pointed out in The Global Scramble for Yield, we are awash in liquidity and it is chasing the elusive higher yield. It moves fast from bonds to gold to stocks as fashion dictates. Where does the liquidity come from? One imagines hordes of frugal Chinese saving like the Japanese, but it is not so - they are turning out more like the US, profligate spenders. No, it does not come from the virtues of old - savings, thrift, etc. - but from credit. The credit to GDP ratio in the US is over 3x. For comparison, it was under 2x at the peak in 1929. And stayed well below that for a long time, as that generation learned the old virtues once again. You wonder how this can end well ...

Turn Turn Turn

We noted in Divergences Abound that several Turn Dates were approaching.  We came through our first Turn Day of Feb 16 with a turn in all indices to the day.  Kudos to both Fibonacciman and Robert McHugh for their calls. What happens next is unsettled in the ewave community.  Most expect continued downside, at least in the near term; even the bullish The Elliotician sees a little more down before a continuation to much higher levels. 

These turn dates have not yet been systematically incorporated into Elliott Wave Theory and should be looked at as a promising experiment.  Yelnick has recommended to Prechter's organization that they put more focus on this topic; perhaps they will (at the next Free Week no doubt).  Currently they are several leading proponents of Turn Dates, including Prechter's Elliott Wave International itself. They use different methodologies, and sometimes come up with what we now have: turn dates at Feb 16, at Mar 4, and at Mar 16.  It is likely some sort of turn happens within a few days of those dates, and someone will be able to crow about it.  As they say, even a broken clock is right twice a day. In the meantime Yelnick will watch these for you and attempt to separate the wheat from the chance.

FIbonacciman has made some good calls, so we are watching his newsletter. Robert McHugh's method seems to be working the best: his posts are publicly available to check (although he is shortly to go to a paid newsletter service, sad for us who believe the proper model for the web is ad-supported and freely exchangeable).  He describes his method and success as follows:

Since this dramatic date [Jan 14, 2000], every single market top or bottom of measurable significance has occurred precisely in a Fibonacci .618 to .382 ratio of trading days from either that starting date 1/14/2000, or another top or bottom that has occurred since 1/14/2000, based upon closing balances. This is astonishing! A mathematical formula has been 100 percent correct in predicting market tops or bottoms in the Dow Industrials since the Bear began on January 14th, 2000, exactly five years ago today! Every top. Every bottom. Every turn. Each, an exact Fibonacci ratio number of trading days from the Bear's start and from another top or bottom during that Bear. And the trend continues.

The STU has a different next turn date of Mar 4.  They get there by noting the decaying technical indicators of this market and trying to predict the next turn based on a cyclical set of patterns since 2000.  Ironically for the leading proponent of Fibonacci ratios, these cyclical patterns are not Fibonacci based.  Doubly ironic for them as perma-bears, they think we have more upside to go, whereas as McHugh for example thinks the top is in and the big drop coming fairly quickly.  The STU sees both a 247 trading day cycle and a 360 calendar day cycle marking major turns in the S&P since the top in Mar00: 24Mar00 (top), 22Mar01 (bottom), 19Mar02 (top), 12Mar03 (bottom), 5Mar04 (top). They point to the next turn date in the period of 26Feb to 4Mar.  They expect yet another March to come in like a Bull and out like a Bear for the S&P.  Interesting is that the top/bottom pattern might instead suggest a drop from Feb16 to Mar1 or so, then a turn upwards.  Watch this space for the next few weeks.

Rethinking the Wave Count - the Dollar/Dow Ratio

Now that Prechter's Elliott Wave International is in Free Week, it is putting out some very interesting titles. Perhaps the web is learning from TV - the best shows are on during the ratings sweep periods.  This month in the Elliott Wave Theorist Prechter himself tries to explain why his calls seemed to misfire around Oct02 to Mar 03.  His answer: he likes to watch the Dow in nominal terms, but he is rethinking that, because when the Dow or S&P are adjusted against a stable basket of currencies, the wave count looks right.  Put differently, with the Dollar dropping 33% in the last three years, global flows of money can move to adjust, and so a relatively flat Dow in Dollar terms actually is a drop of 33% in stable currency terms.  And this is what happened: the Dow and S&P dropped farther against a stable currency than they appeared to against the Dollar. 

Yelnick has long taken the view that a constant-Dollar Dow is a better index to count than the nominal Dow.  Perhaps normally the nominal Dow is watched and influences market participants, but during periods of high deflation and inflation they adjust for the value of the Dollar. 

All That Glitters .. Time To Jump In

Further support for a buy signal on gold: one of the Yelnick readers has been charting a falling wedge formation and in the last week has seen a clear breakout to the upside, above the channels of the wedge.   The countertrend move is on!  This is a wave 2 rally that should last a number of weeks, hence is a trade not a long-term investment in gold.

All That Glitters .. Is Not Worth Investing In

Sometimes Prechter's Short Term Update (STU) is worth its weight in gold.  An example is today's issue, available during Free Week (see button on left column).  Back in the post-election euphoria and rally, a new ETF came out called GLD, for trading in gold issues.  Yelnick predicted that this would be the gold top, based on the STU and other sources.  This turns out to have been a good call - the STU reports today that in the first five weeks of 2005 gold has lost ALL of its gains for 2004. The drop has been in five waves - so NOW is the time to buy gold, as it should soon start a countertrend wave 2 rally before continuing to fall. The STU is timing this bottom based on the Australian Dollar, which is seen as a commodity marker since so much of the trade from Oz is minerals, food, wine and wool.  It appears to be ending a triangle over the same period that gold has dropped, suggesting it and therefore gold is about to rise too.

Yield Curve Predicts ...?

From a Yelnick guestblogger: On Tuesday, the spread between the 10-year and 2-year Treasury was 70 basis points, something not seen since 2001. And, almost daily, we see continued tightening. With the consistent convergence of the yield curve, the question is what does it project or predict?

Mat Johnson, Director of Strategy and Economics at Think Equity Partners, commented "The effect on the long end of the curve was to rein in future inflationary expectations." And, as a result, he believes long-term bond yields and, specifically, the narrower rate spread, are indicative of low inflation expectations rather than impending recession.

Let's hope Mat's right and that the Fed actually holds to their stated mantra that they will not, by themselves, cause the yield curve to invert.

It appears we've entered a phase of slow, steady growth with limited inflation exposure that may be with us for quite a while. Now we just have to hope that we can start to get government spending under control, keep the Fed from going overboard on rates and stay out of any more significant global conflict for a few years. We'll see.

Yield Curve Flattening - is the YE$ Currency Coming?

In bonds, optimism is back, oddly enough, because the yield curve is flattening.   While the Fed raised short term rates by 150bp, long term rates actually shrank by 50bp.  Bond traders do not expect inflation.  Will the Fed keep raising?  A few more of their 25bp pops and the yield curve will go negative - short term rates higher than long-term.  Usually presages recession.  The Fed has been trying to jawbone world markets, and surely does not want to signal that.   Hence maybe the bond bulls think the Fed's hand is limited in how much more it can raise short-term rates.

In contrast, the European central bank has done a fine job keeping the Euro on a sound footing.  No need to finance an expensive war in the desert.  And the Chinese have noticed - they are moving from Dollar reserves to a basket of currencies, notably the Euro and Yen.  The basket of Yen, Euro and $Dollar is called the YE$ currency. 

Meanwhile, the Dollar is going UP despite weakness in the long bond yields. This concerns the punditry who have been pounding us with Dollar-weakness tales of woe, but was predicted by Yelnick last November.  The Dollar just broke up above its upper trendline, and is poised to spike up while the Euro falls. 

It is often parroted that a weak Dollar is good for the US trade deficit, hitting records daily.  The pundits easily forget that the trade deficit is the other side of the currency flows.  As long as there is strong demand for the Dollar as a reserve currency, and demand to invest in the US in Dollar-denominated assets (such as stocks and real estate), the currency flows can be positive, forcing the trade flows to be negative.  A lot of this imbalance is picked up in the oil trade, carried out in Dollars.

What the pundits expect is that a cheap Dollar makes US exports increase. But does it in the current environment?  China has pegged its Yuan to the Dollar.  However far the Dollar falls, Chinese goods fall as well, in other currencies.  As long as the peg holds, we cannot cheapen the Dollar below Chinese costs. Well, couldn't we always increase exports to Europe, where their Euro until recently has been appreciating against the Dollar?  Perhaps not much, if they can buy what they need at the cheap Chinese price.  Won't the Chinese peg fail to the onslaught of Dollars they need to buy and hold to maintain the peg?  Not if they diversify out of the Dollar into the Yen and Euro.  In order to make that work, there must be demand for Dollars. ... And then along comes a Dollar rally.  Tailor made to allow the Chinese to diversify out of a Dollar reserve. 

And thus the need to finance the war in Iraq, plus other expensive programs (the wrong sorts of tax cuts, social security reform, new entitlements), put the US in a difficult spot.  Longer term, the results of our extravagance may be a weaker Dollar, a YE$ currency basket, and a loss of our predominance in world finance and trade policy.  Let's hope the Iraqis make the most of their chance at freedom.  The cost to the US may be higher than we imagine.

Divergences Abound

The groundhog may have seen his shadow, but the market still seems a bit spooked.  The Dow is the most straightforward: it looks like it has bounced since Jan24 in a three-wave corrective pattern, but remains below its Dec28 high, which might mark the end of wave 2 (or wave B) since the peak in 2000. The S&P has bounced in a five-wave pattern, which opens to two possibilities: it has not yet ended its wave 2 (or B) bounce; or it is correcting in an irregular flat.  In either case it should still go higher, possibly after a small correction this week.  The Nasdaq 100 closed three standard deviations below its 50 day moving average.  The last time this happened was at the peak in 2000.

One interpretation of this is that what is occurring now is similar to what occurred in 2000: the indices diverge, peaking in a rolling fashion. In 2000 it was first the Transports (in 99), then the Industrials, then the S&P, and then the Nasdaq.  Giving some support to this is the analysis of several Elliott Wave analysts who have focused on turn dates based on some Phi ratio (61.8% and its square 38.2% usually, the square root 78% and the reciprocal 1.618% occasionally), the so-called Fibonacci turn dates.  Robert McHugh sees two coming turn dates: Feb 16 +/- 2 days, and early March.  Possibly only some of the major indices turn first, the others in the second window. Prechter's group has also been tracking turn dates, although with less success than McHugh, who claims a very high success rate since the peak in 2000.

The Bullish Case 2005

This blog site evolved out of a private newsletter, which explored whether the drop off Jan00 is a wave 4 with a wave 5 to higher levels to follow, or a wave A as Prechter thinks, the beginning of a long and deep bear market. Yelnick has not laid this out for a while; you might take a look at an older post called The Big Picture, which was updated in a post called The Bullish Case and laid out this summary:

The question right now is whether the correction since the 2000 peak is 50W4, a major correction of the magnitude of 50W2, which lasted 16 years; or 82W4, a smaller correction in a continuing bull market. So far the broader market is down 50% from the 2000 peak as compared to the beginning of 82W3, a normal wave 4 correction that would fit the view that we are in 82W4. If so, 82W4 could have ended in Oct02 or Mar03, and we have begun 82W5; or 82W4 is still proceeding, and we have another wave down ahead of us. (It would count as an ABC, with the A wave down to Oct02 or Mar03, the B wave having possibly ended recently, and we would be in the beginnings of wave C down.)*

Some of the e-wavers have counted the move off the bottom in Oct02 as the start of 82W5. There are two quite different views of this wave 5, if it is a wave 5: The Elliottician believes we are in a new bull market that will go to new highs; whereas Zoran expects a truncated fifth wave, meaning one which does not go to new highs above the prior third wave. The Elliottician's view would expect us to make new highs soon, regardless of any January Effect or Presidential Cycle. Zoran's view is that the truncated fifth wave will presage a continuation of the bear market; indeed a major drop that would be 50W4, correcting the rise since the bottom in 1949, rather than 82W4, correcting the rise from Reagan's Morning in America.

This is the fundamental question right now: are we still in an up market, or about to continue with the bear?

January-Effect Watch - Final Thoughts

January ended down, about 2.7% on the Dow. The Naz fared worse, down 5.7%. This is the fourth time in six years for a down January, although not all those years were down.  The January Effect is not 100%.  Nevertheless, we were inundated with January Effect stories in the business press, on how chilly the stock market weather could be later this year.  Well, the Groundhog saw his shadow, meaning 6 more weeks of winter to those who believe in such things.  How much stock should we put in this indicator?

The Yelnick view is these statistical patterns without underlying causality have little if any predictive value.  Yelnick follows the four year Presidential cycle since its causality is fairly obvious.  When Presidents vary from the script - as Bush 41 did in 1988 - the downcycle "right shifts" - in this case from an expected cyclical bottom in 1990 to an actual bottom in 1991.  Well, a war intervened, so we can understand why the right-shift occurred.  Yelnick also follows the Kondratieff Wave, since it too has underlying causality, although the timing of the wave is not always precise (more on this in an upcoming post). 

These patterns can often be fun.  Soon we will see stories of the Super Bowl Indicator, one with no plausible causality: that if a former AFL team wins, the market is down; if a former NFL, up.  The Patriots (AFL) play the Eagles (NFL).  The January Effect says, bet on the Patriots.  (So does the point spread, and most pundits.)  Fun - but they should not guide investing. 

In this spirit we have a marvelous divergence of patterns.  We can apply a simplistic form of Bayesian reasoning to these patterns, and look at two or more of them together to see what insights emerge.