Bubbles and the Line of No Return

About every line in the sand has been washed away with the recent rally - EventHorizon's Dow12528, the recent Feb highs, the hedging of Hochberg (he still expects a decline to start shortly), Dow Theory (Friday's close above 12,743 got us back to a buy signal so quickly), the Google surprise, etc. etc.  A close above SP1400, and then a run above Neely's final line of SP1475, and game over.  So, expect a pullback next week!

How can the Fed survive the last decade?  Greenspan bails out LTCM in 1997, and causes the Dot-Com Bubble.  Greenspan kills it in May2000 with a 50 bp rate increase, and Congress over-reacts with really terrible attempts to 'fix the problem' that have had the effect of killing the golden goose of the US economy - tech jobs, the last bastion of high-value jobs against the Chinese onslaught of cheap manufacturing.   Then he re-inflates in 2001 and creates the Housing Bubble, inducing a generation of Boomers to stop saving and bank on their home equity for retirement.  Oops!  Then Bernanke reinflates after the July credit crunch, and the hedge funds have rushed into commodities to deleverage from subprime debt and the Dollar.  Up 40% across the board in 6 months, to the unintended effect of a huge spike in food, especially rice, and now perhaps 1 Bilion (yes Billion) people under threat of food shortages. 

The Next Big Bubble, the Commodities Bubble, is being recognized as such. Let's take a short look at bubbles. 

All bubbles correct to their start. Question is what is normal and what is bubble? 

With the tech bubble, Prechter used to peg the start to 1994, and predicted that the markets would drop to those levels.  Dow4K anyone?  Instead they corrected in 2002 to the same levels reached in the 1997 and 1998 bottoms.  Hence it is better said the dot-com fever hit after Greenspan bailed out LTCM, and continued as he fed liquidity to fend off the Y2K problem.  Then he put on the brakes, and markets corrected down to the 1997 level.  Which has held ever since. 

With the housing bubble, all the blame cannot be dumped on Greenspan's fear of deflation in 2001-2 and excess liquidity via really low interest rates.   Housing began to inflate above historical trendlines as far back as 1997.  Ah, that date again!  Since it started concommitant with the liquidity excess of Greenspan in 1997 and 1998, is he again to blame?  Well, maybe a bit, but note that every ten years or so US housing does a boom-bust cycle: rise in late '60s, bottom early '70s; rise in late '70s, bottom early '80s; similar in the late '80s, and so a normal cyclical rise and softening was to be expected in the late '90s.  The bubble part is the excess above that - the period of 2003-2005.   As with Prechter's 1994 start to the tech bubble, a 1997 start to the housing bubble seems too pessimistic.  The long term trendline of real estate in the US suggests it needs to fall 40% off the top in 2005, and it has only fallen (as best anyone can figure) around 20%.   If the bubble part is only since 2003, the good news (of a sort) is that we should expect housing to bottom soon, at or above the long term trendline, and roughly where is was in 2003.  Not as bad as the fear-mongers predict.

Now the Commodities Bubble.  Of the same character as the prior two bubbles: the Fed injects excess liquidity, credit markets take advantage of it, and some sector reaps the momentary rewards.  Think of a huge balloon being blown ever larger, with bulges here and there (tech, housing, now commodities).  We have been rotating sector to sector after each bulge bursts.  The whole credit balloon is now rapidly deflating, so I expect Commodities to be the Final Bubble: POP! sometime in 2009.  As with dot-com's beginning in 1994, before its manic phase; and housing beginning in 1997, before its manic phase; the rise in commodities began during the prior bubble, 2003; but the manic part only began last October.  So we would normally expect a retreat back to October commodity levels, themselves fairly elevated over historical trendlines, except ...

The final bubble should over-correct, since the whole credit edifice is crumbling; and and especially in volatile markets like commodities.  A glance at Gold or Oil will convince you of large fluctuations in value over the past 40 years.  Oil was $10/bbl around the dot-com peak, $16/bbl before 9/11, and has a long-term trendline that would put it somewhere between $25-40/bbl (the range being due to the value of the Dollar, which itself has dropped 40% since 2001 - $25 in 2001 Dollars, $42 in 2008 Dollars, somewhere in between when the Dollar *finally* recovers).  The fly in the ointment is Peak Oil, discussed in one of my companion blogs.  If we have hit it, the long-term Oil trendline will move up as demand outstrips the ability of the oil industry to increase daily production.  There is a lot of oil in the ground; it just has limits on how much can be extracted per day.  But I am skeptical we have hit Peak Oil, in particular since a major new field appears to exist off Brazil, and in the Arctic.

This leaves us with timing of the Commodity Bubble top.  Given that the dot-com bubble went about 20 months (Oct1998 - Apr2000), and housing about 40 months, perhaps a six-month bubble has a year or more to go.  This would coincide with my expected end of the final market Surge, around April 2009 (the first 100 days of Hillary or Obama).  And yet, much of this final bubble is the de-leveraging from the credit crisis, and is much more damaging to global economies than the housing or dot-com bubbles were.  Hence I expect global intervention by governments to break this bubble well before April 2009. 

The first move and best move to break this bubble would be to back the Dollar.  Last weekend the G7 countries jawboned about this, and yet the Dollar and Euro seem to remain intertwined in their dance.  I have yet to see the coordinated interventions that have marked prior G7 currency management.  The wave structure of the Euro and the Dollar would suggest the dance is about to end; certainly by early June. It will probably be marked by a spike up in the Euro to above $1.60, and a sharp drop in the Dollar to below 70 in the Dollar Index.  Maybe that will reflect a short squeeze on speculators as the G7 central banks begin intervening.

Hence right now pay less attention to equity markets - they seem destined to stay in a corrective mode into May and early June.  Instead watch the Dollar/Euro ratio, the actions of central banks, and the most volatile of the commodities in the Commodity Bubble - Oil.  When it drops sharply, the game may be up.    

Comments

[Jack Stevison]

lots of people like to blame greenspan for the housing bubble now, and you are correct to state that it began in 1997, but many people forget the tax law changes that went into affect that year to encourage the flipping of houses. gains from sale of residences were only excluded from taxation if rolled into a new home or if the seller was over 55 (one-time). The change in '97 went unnoticed while the craze in stocks were on everyone's mind front and center. take away the stock bubble and hey look, it's real estate. as for oil, there might be something to that peak oil theory, but it sure does look to me that it's mostly driven by the destruction of the dollar.

great post.

[I. Sosceles]

I'd watch AAPL. It has another possible week to go before it jumps off the diving board.
I don't see the market rise here being sustainable. No collapse either.
Traditional Wave 4 action.

[rc]

I.Sosceles - agree w/ your 4th wave (except it's long and drawn out) and certainly w/ Yelnick's advice to watch the dollar. Also, interest rates -- despite the IRX (13-week) hitting a record low, the TNX (10-year), failed to do the same.

So, the bulls are pricing in a 2nd half recovery w/ the stimulus payments about to hit mailboxes etc. I'm bearish -- I don't think there'll be a recovery. And that stimulus will barely cover $4 gas and higher groceries.

Short term, we're overbought and due for a downturn Monday or by mid-week. It could be the end of this putative 4th -- there are certain time and other relationships -- or just last for several days. I'm inclined to cautiously short Tues or Wed... not sure yet.

[I. Sosceles]

re: AAPL

A canary by any other name.

Coming up: four days to spin the Garden of Eden web.

[TObject]

Frank Barbera "...an extended Primary Wave Three could easily lift Oil prices toward $250-$300 per barrel by 2010-2011, with a final high for the secular bull market ultimately potentially pressing $500 per barrel. "

http://www.financialsense.com/Market/barbera/2008/0325.html

[sam]

EventHorizon's Dow is 13000

Rats!
They fought the dogs and killed the cats,
And bit the babies in the cradles,
And ate the cheeses out of the vats,
And licked the soup from the cooks' own ladles,
Split open the kegs of salted sprats,
Made nests inside men's Sunday hats,
And even spoiled the women's chats,
By drowning their speaking
With shrieking and squeaking
In fifty different sharps and flats.

“When, lo, as they reached the mountain's side,
A wondrous portal opened wide,
As if a cavern was suddenly hollowed;
And the Piper advanced and the children followed,
And when all were in to the very last,
The door in the mountain-side shut fast.”

[deacon]

indeed, xlnt posting Yelnick!!
neely got short TY(10 yr note) last friday:
(http://www.traders-talk.com/mb2/index.php?act=attach&type=post&id=6903)
...bond complex down implies stock market will rise and commodities will drop, higher rates give a stronger dollar...what's been reliable at least a year is if TY and JY(the yen) are green, then SP is red, great inverse...greenspan's actions saved the world economy after 9/11/01, and bernanke did similarly saving bear stearns before the whole world derivative scheme could come tumbling down this year...war is keeping crude oil detached from reality, and whenever the iraq war ends and the iran threat is eliminated, then it will be time to buy real estate and equites again, prices will be lower than today on both those asset classes when the 'war on terror' ends

[rc]

I have daily time-frame sells as of the close today on the equity indices. If these signals follow-through, there will also be weekly sells. Signals typically last 4-6 periods. My current map of the market is that the correction (am calling it a 4th for several indices) following the impulse from October to March has ended.

Some lines-in-the-sand:

RUT: 736 resistance, the Nov, perhaps 1st wave, low of the Oct-Mar impulse. This level also held the 4th wave high in Feb of that same impulse.

Dow: 12800's resistance. 12845 is the Feb 2007 high, but more importantly, the 12800's (+, -) mark the top of a trading range that's been hit on four rally attempts since January. On Monday, the high was 12902, but the close was 12825. A close at or above 12900 would be signficant.

Technicals are set-up now for the beginning of a new impulse down (5th?) of the same magnitude as the Oct-Mar impulse (3rd?).

[rc]

I. Sosceles - if we are about to begin a new impulse wave down now (of the same degree as that from Oct-Mar), then it should feel like a collapse.

From a fundamental pov, the market has held up, based on some positive earnings and bullish optimism, despite increasingly bad currents. The dollar is in serious trouble, but that negative is turned into a positive that this just means it's due to turn-around. The same w/ oil, housing, financials etc. There is even talk of rationing food.

The fundamentals are increasingly negative, but, the market remains bullish. That's the sign of a top, not a bottom or even sideways.

[TObject]

EWI's Robert Kelley projects new market highs soon
http://yorbatv.ning.com/profiles/blog/show?id=2014856%3ABlogPost%3A3722

[Mamma Boom Boom]

Three (3) days into the trading week and the technicals continue to deteriorate. It's still 'SELL'.

http://www.bushongbusiness.com/opinion.html

[Eventhorizon]

Boy, those EWI boys are a laugh.

After calling for tops endlessly since at least 2005, firstly the top of a counter-trend wave 2 following the "never-to-be-seen again for decades" highs of 2000, then as the top of wave b which was to be followed by a wave c that would herald lower lows than we saw in 2003, now Wave IV is over and we are on our way to new all time highs?

I take it their entire strategy is to have each analyst make a different prediction and ex-post point to the closest one and say: "if you had guessed correctly which of our analysts would be right in the future, and wagered your entire net worth on that guess, you would be rich today".

This is better than tossing a coin how, exactly?

[yelnick]

Event, I must say, watching EWI for years, it can feel like a random walk. At least unlike Neely they will hold on to a position dearly for a long time. Neely's river is quite fluid ... But to clarify, right now they see us in a wave 2 (Wave 1 was Oct07 to Mar17). They say it has gone back far enough in price (38%) but not in time nor "look". So now they expect this wave 2 to go at least to 50% back up - SP1416, Dow13K. Timing? The various trendlines seem to converge the first week of June, but STU has not been that explicit yet on turn dates.

To their credit, the wave pattern since Mar17 in all indexes looks corrective not impulsive - overlapping waves. This suggests to me that we are still in a 'plateau' from Jan23, and probably need one more test of the bottom (Jan23, Mar17) before the Surge begins. Maybe this down trend starts around next week's Fed decision on rates ... possibly the Fed drops one more time, and Dollar drops as well, and serious effort to save the Dollar is delayed until late May or June.

One other factor: the pattern of an election year rally (beginning in May) usually results from clarity on the election. Right now Clinton has continued to keep mystery in the Demo side. It may take resolution of that before we get the Surge. And that might take as long as the Demo convention in late summer.

[Upstart]

I would say it for the last time, but I may have to keep pounding it in...The 3.3-yr. cycle bottomed. A vertical final phase is underway to a multi-year top in July. Target is about 14570...A classic spike ending like 1929 or other grand tops.

[Eventhorizon]

Thanks Yelnick - did you watch the video on YorbaTV (link posted by TObject)? The guy they had on was from EWI (Bob Kelley) and he claims to be responsible for some short term publication (global?). He is calling for Dow 16,000 over the next 4-6 mo.

This is clearly in conflict with STU. I have emailed them before when I have spotted clear conflicts on the same time frame between their publications. The response I get is that this is the strength of EWP: flexibility!! LOL - it's a strength alright - of EWI's marketing strategy, that's about all.

Upstart, the problem with cycles analysis is that by the time you accommodate all the different alleged cycles and compound that with right and left shifting (I mean, what do you do when the 4 year cycle low is 3.9 years late?) they are pretty much useless. By that i mean you can get any cycle to fit the data ex-post - not unlike Elliott.

[Upstart]

Eventhorizon, I agree, but I'm using more info than that. For one, I have something that indicates to me that the Jan. low (DOW) was very important, and since the 3.3 was due in early 2008, I'm surmising, with minimal lag (I've been saying it for weeks.), that the cycle has bottomed. I'm using it in an anticipatory way. I choose to believe it has bottomed based on evidence I'm trusting for now. Any analysis is educated guess.

[Upstart]

I meant to say any forecast is educated guess.

[EN]

In response to Yelnick's post, Neely actually sees the start of the multiyear bear market at 1475 spx, not the absolute high at 1576 spx. Also, the move down so far is being labelled as a short-term corrective structure, which implies that the C wave down is a corrective wave in a neutral triangle (not a contracting, because the 2000-2002 sell-off was not violent enough to be the A wave of a contracting triangle). If it is not a large multiyear neutral triangle (where C will break below the 2002 lows), it will likely be a C wave terminal (ending diagonal). When C bottoms, assuming it is a terminal, all of the 2007 to 2010/2012 bear market will be erased in 25% or less of the time that it took wave C to form. Stocks will rise faster than they have in 10 years.

However, I remain skeptical that a new multiyear bear market has begun as the sentiment at the march lows was as extreme as at other major multiyear bottoms.

Confirmation of a multiyear bear market requires a massive sell-off into summer. We shall see, we shall see. . .

[Upstart]

Along EN's lines, someone, either in Barron's this week or on gold-eagle, showed how low the bullish percent indexes were at the March bottom - comparable to bottoms like 1998, 2002, etc. If I find it I will reference it.

[Sean]

Can I ask all intelligent posters here a question about Sentiment?

During bear market of March 2000 ~ March 2003, did the sentiment always got bullish? bearish?

I would imagine the sentiment consistently stay in the bearish territory most of the times, and that really fit well with the overall stock market trend -- DOWN.

Did I guess correctly? If you, sentiment is just a lagging, or coincident reflection of market, isn't it?

During bull market 2003 ~ 2007, I saw that many sentiment polls were mostly bullish.

So, if sentiment is not a useful forecasting tool most of the times, then why are we still talking about it? Is it only useful when it comes to EXTREME bullish and bearish, marking a top and bottom?

thanks!

[Hank Wernicki]

Sentiment is only one tool that sometimes work .......

It's just one variable in the equation

[EN]

For me, sentiment is one major indicator that inspires a lot of confidence IF other tools are lined up for a turn as well, e.g., price, time, divergences.

Polls are not enough for me. I need somebody I know who normally does not follow the market to start noticing the news and bringing it up with me in casual conversation. That happened on January 21 of 2008 when I went to a meeting with a work group (who has no clue about trading) and everybody started talking about how the market was crashing and there was no end was in sight. The DOW bottomed the next day!

Same thing happened several months back with the Canadian dollar, e.g., my friends (fellow Canadians) were euphoric about how strong our dollar was, saying it would be worth 2x USD in "no time flat". It topped that week and has not seen the highs since.

Just before gold topped at 1034, friends were taking about melting jewlery (Okay I have a few moronic friends). My wife picked up on the euphoria and instructed me to sell it hard (which I did not). Damn!

Now, it certainly does look good for the US markets if we can rally up into May and take out the downsloping trendlines from the October highs. I will personally try a few shorts around 1410-1415 SPX next week with a short leash on them just in case we are in a Bear. If it does not turn around at that point, the bears are going to be hung out to dry, yet again . . . If we do top there, this will like be an expanding environment where each swing is bigger than the last, making it very hard for long term bears to hold on. We would then expext to see 1060-1175 by sometime this summer.

In the end, nobody really knows. That is why we are speculators.

Very exciting market to be sure!

[MKB]

> Did I guess correctly?

No.

Schaeffer Research has some free charts to research various sentiment indicators:

http://www.schaeffersresearch.com/streetools/filters/inv_int.aspx

The above URL is for Investors Intelligence. You can use it to see that during the 2000-2002 bear market, II sentiment stayed relatively (some may claim extremely) bullish during most of the downtrends, spiking bearish sentiment only around the bottoms, then quickly recovering during the rallies.

> [Sentiment] is just a lagging, or coincident reflection of market, isn't it?

Yep.

Let me echo agreement with the other remarks about sentiment...it's just a tool, and not a very accurate one, for predicting trends and turns in the market. I believe sentiment is best used only as a background indicator.

FWIW,

MKB

[MKB]

The snipped URL ended with...

..../streetools/filters/inv_int.aspx

MKB

[dlu]

I am not able to count the action from march low as impulsive.It is best counted as abcxabc.may be you guys
have a better count??

[EN]

I would start the count at the Jan 22 low. It will then be a triple correction with the last segment in progress, likely a contracting triangle that will end at a lower high than the absolute high for the rally.

I lot of guys are getting excited about an inverse head and shoulders. But the move up has to clear the 200 day exp. moving average, the 50% retractment of the entire move down from the October highs, and various fibonacci extensions, all of which are clustered between 1407 and 1420 spx.

[rc]

Inflation - Deflation. Which is it? A collapsing credit bubble... deflation. Rising affluence in China and India causing increased demand for resources... inflation.

Is gold going up or down? Its intrinsic value is (more or less) constant. So, it's a rough measure of the value of the currency it's priced in. If it goes down in dollars, then that'd mean the dollar has become more valuable.

Currencies are also measured against other currencies. So, gold could go up/down to currencies in general and the dollar up/down relative to other currencies -- independently.

In a round-about way, what I'm trying to get to is that I'm having a hard time accepting a commodities, or finite resources, bust. An economic downturn would make people poorer and lessen per capita demand, but the world's population hasn't stopped growing. It would take signficant and prolonged negative economic growth to overcome the effects of population growth. Someday, there will be _peak population_ but we're not there yet.

Does anyone really believe the US Peso... dollar is the next best investment? When other currencies unpeg, won't that further its collapse? Should one sell gold (oil, wheat etc.) and hold dollars? (or vice versa?)

[dlu]

rc india index has completed 5 primary waves up and is
in cycle degree correction. similarily china has completed primary wave 1 and is correcting in primary 2
this market is best for investing.while in thecase of india a prolonged correction is in offing as it will correct a cycle degree correction and Bombay sensitive index is expected to correct to 6k to 4k level and still much above previous 4th primary wave level of 3000 level as primary wave 5 was an over extended wave from 2904 to 21200 bubble level like japan. This bubble should get deflated first before it becomes a buy. chinese bubble was deflated reasonably till 2002 and it became a screaming buy.AS far as growing affluence of india china is concerned I fear it will take many decades before benifits of globalization are distrubuted to all equally in india. this country has tremendous potential to take on china but a very corrupt political and burocratic system, the caste and religious divide are obvious impediments which will take time to vanish. china has communists to deal with. In their presence the growing might some times looks fake.But still these are countries which should do extremely good in the long run.

[Upstart]

What I'm liking right now is that few see us in a quick move in an ending wave to the final high as I do - one exception being the interpretation by Robin Landry that yelnick posted on March 30. Essentially, I think Landry has it right, although Prechter will label the same action as a double zigzag B-wave from the 2002 low (the x-wave being a large triangle from 1/04 to 10/05).

[Upstart]

Correction: Robin Landry's chart was posted on March 20.

[Ham Actor]

Im just not buying the 3.5 year cycle argument, new highs or the surge. We continue to see an overlapping series of three wave moves. In my experience when you can't see clear five waves to the upside be very cautious. Not to say that it can't develop, but I'll wait to see if key levels on the downside get breached and then act. It is not just the US that is exhibiting clear corrective action. My assessment is that equities are in a down trend globally, the next move is going to be significant and we are close to topping out.

[deacon]

event risk this week!
friday bulls looked to have the 1415-25 SPX goal in mind, so they ought to make a big effort to get it done before the fomc decision...next friday's non farm payroll should be horrible(worse than -100K) but we'll know more after the ism report...why start the war with iran: incumbents never lose in wartime elections and mccain the perfect war pres.

[TObject]

dlu, whats the target for Wave 2? Gap at around ~21500 on $HSI?

[Sean]

Thanks, MKB.

[Sean]

MKB, Thanks!

[Droopy Dog]

Dow Theory is on a new BULL SIGNAL! First since 2003!

What does Prechter say about that!

[xyz]

Droopy Dog

Prechter wants you to do your own count and to stop sniffing his ass.

[deacon]

fresh neely SPX still in B of ABC down:
(http://www.traders-talk.com/mb2/index.php?act=attach&type=post&id=6977)
here's some decent multi year charts to show you how bonds go opposite stocks and crude oil:
(http://tradingeducation.com/archives/klombies_daily_042208.asp)

[min]

I have seen many "abcxabc" patterns morph into what ended up being an impulsive pattern. Keep that in mind if becoming overconfident. Best bet is to use "Can't hit the side of a mountain at 50 yards" Hochner as a contrary indicator. That is reliable 9 out of 10 times

[wavechart.com]

Hey min:
You know my secret indicator!

[wavechart.com]

By the way, here is EWI's response to the major wave count discrepancy among its analysts:

"...we always have alternate counts, i.e. what to think if
our main opinion turns out wrong. Robert made the case for why the bullish
wave count is valid. We would have to break the January lows to knock it off
the list.

Best regards,
Vadim Pokhlebkin"

[EN]

EW, as practiced in Prechter's book, is a big waste of time. It amounts to nothing more than a guess at market direction, one which is usually governed by emotion and thus wrong. Everybody sees something different based on their bias like a Rorschach inkblot.

Simple wins the day in my view. Today we touched 200 day simple moving average in NDX and almost in INDU and 200 exponential in SPX. We then had the largest, fastest decline in a few weeks which, in all likelihood, means the rally is done and we go back to fill gaps left a fair bit lower for starters.

[Upstart]

I expect we correct until sometime Monday 5/5.