Planet Yelnick

China Bashing - Getting the Dollar Story Backwards

It is a bit curious why shareholders are moving away from risk right now. The economy is not doing too badly, and inflation fears seem overblown. Perhaps it is due to upcoming policy changes that are wending their way through Congress?  A recent House bill for removing the estate tax also proposed a 27.5% tariff on imports from China unless the Chinese float their currency.  Smoot-Hawley of 2005?  And foolishly unnecessary to boot - the Chinese are quietly preparing to float their currency for their own benefit, not the US's.  Indeed, the Chinese economy is beginning to fray, and we might find that despite all the scare stories of China, the Emperor has no clothes.   

Why do we think the capital of China is Bashing?  These types of analyses, that blame our trade deficit and economic ills on mercantilist policies in China, have the causality backwards. We are not being keep afloat by Asian forbearance. Instead, they are acting within a larger drama - they are effect not cause.

In Search of the Bifurcation Point

A famous piece of sage advice is no one ever got rich by selling at the top. The bulls make money, the bears make money, but the pigs get led to the slaughter.  Yet the desire to predict the top goes on.  Given the coming Last Chance Saloon to bail out of the market, how do we know when it arrives?  To put the question the way a loyal Yelnick reader did: how can we predict the Zoran Bifurcation Point?

The backstory is that this week we had a fairly clear end of a little wave 2 and were beginning the wave 3 down when on Tuesday the market turned and shot up at the end of trading. Did this mean the wave 2 had legs, or was it a typical short squeeze that would be quickly retraced? For those of you who took advantage of EWI's intraday chart free week, it was clear during the day on Wednesday that wave 3 had continued. The short squeeze was retraced very quickly. Some of the ewavers put out Wed bulletins - Fibonacciman for example - saying watch out for vertigo ahead.

Yelnick comments on stock market issues, and tries to find the consensus view among the ewave punditry, rather than try to add yet another opinion to the mix. When the punditry is mixed, Yelnick will proffer an opinion. Yelnick noted the issue on Tues, noted the retrace on Wed, and put out a Dow Sell Signal report on Thurs. By the end of this week, even the shoeshine guy on Wall Street knew to bail out of equities. Wave 3's are when the herd recognizes the trend.

Was this week's drop predictable?

Last Chance Coming

Fun week.  What to do now?  If you haven't bailed out, you will get a second chance.  If this unfolds as Yelnick expects, you *should* take that last chance out.  What is that last chance?  The end of the coming wave (2). When?  Late May to late August.  As we get closer, the timing will be clearer.

Take a look at recent history.  In Sep02, Prechter bet the last remaining ounce of prestige on calling for a market meltdown. He thought it would be as good a call as the bullish one he made in 1984 that set his reputation, which he has slowly dwindled away ever since by calling "Bear!" way too often.  People who followed his advice got hosed, as the market bounced so rapidly on Oct 10, 2002 the shorts and put values evaporated too fast to react.  Even then, there was a second chance to bail out short and go long - Mar03. 

Now that we appear to have ended the wave [2] bounce from Mar03, the odds of a market meltdown have increased.  The turn down off the Mar7 top looks like a change of trend, since it so far has broken in a five-wave pattern.  While it might not be - most corrections (flats and triangles) start with a three-wave pattern, one type, the zigzag, starts like an impulse with a five-wave pattern - a zigzag is a corrective pattern which goes much lower than the other types.  In other words, whether a zigzag or the start of wave [3] down, over the next few months the market will be down much farther than now. Under the bullish case, it wouldn't melt down, but in either case it is better to lighten up in equities. 

The last chance comes from the wave pattern.  After this leg down, whether it is wave (1) of [3] down, or wave A in a zigzag, there will be a bounce, a wave (2) or B, that normally goes back as much as 61.8% of the drop, and given the propensity of wave 2's since 2000 of bouncing 78%, could go almost 80% of the way back up.  If a B wave, it should  bounce similarly. (Note however that while a B wave in a flat could sometimes go 100% or higher back up, a B wave in a zigzag will behave more like a wave 2.)  As an example, if the Dow drops from close to 11000 to 9500, then bounces, it could go back up as much as 1200 of the 1500 point drop, or back to around Dow10700, close to where it was on Mar7.  That is the Last Chance Saloon to lighten up before the journey across a barren desert. 

Dow Theory Sell Signal

Ah, the bears come out in the spring! 

First, Robert McHugh calls a new turn window: the last week in May, for the coming wave 2 top and then the dreaded wave 3 of 3 down.  Memorial Day for the market.  The timing would fit the early range for the Yelnick view of one final wave 2 before the Big One Down in the Fall. 

Then, Richard Russell of the Dow Theory Letter, whom many consider the leading Dow Theorist, calls a Dow Theory sell signal:  "When in January, the major stock averages broke below their December lows, I wrote that it was a bad omen. But I said that the January lows must hold. Today the Dow and the Transports both closed below their January lows. Now we have what I would call a Dow Theory bear signal in that both Averages have etched out definite downward zig-zag formations. This is an ugly situation, and I think it pins the Fed against the wall."

The stock markets obliged by falling today, with the Dow hitting a five-month low and the Nasdaq being down 10% for the year.   Both the Dow Industrials and Transports closed below their January lows, setting off Russell's signal.  Significantly, the two other leading Dow Theory newsletters have held off pronouncing the call for a resumption of the bear market.   

We are in the wave 3 of (1) down, before the wave (2) into May-July.  This is acting like a wave 3 should - sharply down, and the downtrend *finally* being recognized by the punditry. The smart money has already been bailing out, so now the smaller traders will begin to jump on the bandwagon.  Watch it run for a few days more, possibly with a gap down tomorrow, followed by a choppy, annoying, corrective wave 4, before a final spurt down.  Then we start a fairly strong wave (2) bounce most of the way back up, momentarily emboldening the two bullish Dow Theory newsletters before Russell is proven prescient this summer.

Bearish Exuberance

The markets retraced yesterday's spike. Still unclear if we remain in a complex wave 2 or have restarted down wave 3. Most interesting is *finally* bearish sentiment is beginning to increase. This is not a contrarian indicator, this is an inevitable precursor to the Big One down. Watch this one closely the next two days. Use the Intraday Free Week from Elliott Wave to watch this during the trading session, and their moment by moment view of the wave count.

Premature Bearishness

Today was quite a reversal.  The STU had seen us ending wave 2 and beginning wave 3, but today reversed their count.  The intraday charts (if any of you have taken advantage of looking at them during this free week - click button on the right column) called this change quickly during the end of trading.  Also, Fibonacciman has been doing a good job of watching this closely; I would encourage you to subscribe to his newsletter (it's free). 

Where are we?  We came off the 2000 peaks into a bottom in Mar03.  That was 2000W1.  We likely have ended the wave 2 reversal, 2000W2, on Mar7.  We are in wave (1) of 2000W3 down.  Wave (1) should last through April and into May, and be followed by a wave (2) through May and perhaps through as late as July.  So far since Mar7 we have done subwave 1 of (1) down, and are in subwave 2 of (1) back up.  It is unfolding as a zigzag and should zag a bit higher. 

Sorry for all the nested wave counts but we should recognize that the current corrective action will last several months, since it has several layers of waves to unfold before hitting what Zoran calls the Bifurcation Point: the moment when the market runs either up or down out of the corrective range, and begins a new direction with gusto.  That direction is likely to be down but until we hit it we cannot be sure.  Prechter counts the corrective period leading to a Bifurcation Point as waves 1 and 2 of the new trend; but he adds that one should make an investment decision at the end of wave 2, not the start of wave 1, which is the same advice as waiting for the Bifurcation Point before placing bets.

The bears have been overanxious all the way through this period.  In the four-year Presidential cycle, the first two years tend to be down, especially the second year.  Given all the priming of the pump leading up to the 2004 election, we have a fair amount to work off before a serious drop begins.  We also have robust growth in Asia and reasonable growth in the US. Consequently, 2005 is likely to be 'right shifted' in the four year cycle, meaning the downturn will happen later in the year than normal.  The wave pattern supports this, as it has been unfolding more slowly than normal as well.  The pattern since as far back as Jan04 has been largely corrective, a fairly long time for the lack of any direction.  Hence my advice is to enjoy the new baseball season for a while ...

Intraday Charts

The market is going through a complex bottoming process.  Not clear if it has bottomed, or will drop lower next week first.  The STU believes it is in a minor degree wave 2 bounce for a few days, then will continue down fairly strongly next week or two before it has its 'final bounce' back towards Dow11k. 

For those of you who like to see the intraday charts of the markets' movements and predicted Elliott Wave turn points, the EWI is doing a Free Week for intraday charts.  Click on the button to the right.  Enjoy.

Tech Slowdown

USA Today noted that tech markets are slowing in 2005 compared to 2004:

PCs from 15% to 10%
Cellphones from 27% to 7%
Chips from 5% to 1%

This has been already recognized by smart money - the Nasdaq is down since Jan05, is below the psychological level of 2000, and has been leading the Dow and the S&P down since Mar7.

The fact that McPaper is finally recognizing this is a good indicator that a near-term bottom is approaching, if not this week, next week. Look for the start of a multi-week rally which drives the Naz above 2000 and the Dow back towards 11000 in a 78% retrace of the drop since Mar7. (Why 78%? Because almost every wave 2 retrace in the Dow since Jan00 has been 78%.) This would be the 'triple top' predicted by Zoran and the last chance to bail out before a steep wave 3 of 3 slide into late 2005.

Real Estate Bubble - Take A Load Off Fannie

A trenchant analysis of the real estate bubble by The Contrary Investor concludes that This Time It's Different.  Usually that is used to justify the continuation of a bubble; in this case it is used to put up warnings about a rise in housing prices even if it is not yet bubblicious.  They analyze the current situation against the past thirty years. This is not the largest rise in prices - that happened in the late '70s - but it is the longest rise in real (inflation-adjusted) prices.  And it seems to have ended - the year over year rise in prices has dipped.  What caused the rise?  They note that new home sales roughly follow the change in M3, a monetary measure that best measures availability of credit.  In the last three years, however, the growth of M3 has lessened while new home sales have soared, a divergence that is troubling, as where is the credit coming from to continue mortgage lending at this pace?  Looking at Fed Funds data, they find the culprit: "It wasn't the banks.  It wasn't the S&L's.  And it wasn't even the GSE [Fannie Mae et al. guarantees for mortgage backed lending] balance sheets proper." It turns out to be the entities that end up holding the risk on derivatives of all sorts - in this case a large part of the housing risk is held by GM and Ford and similar buyers of asset-backed securities.   It is estimated that US banking institutions have created $88T of derivative exposure, which is twice as high as it was in 2001 and 3x as high as it was in 1998 when LTCM was bailed out for over-exposure to derivatives.  As the piece ends, this is not a house of cards - it is a house of paper.

Real Estate Bubble - Homeless in Sydney

The blog The Big Picture has been tracking the pundit bubble over the real estate bubble - meaning lots of little factoids proclaiming the real estate bubble is both a bubble and is over, such as this week's Business Week.  There is one item of info that does have post-bubble crash written all over it, and that is this chart from the Australia's Sun-Herald:

Bargains Galore? Sydney's Best Bargains

table courtesy of The Sun-Herald