Inverting the Line of No Return

Later today Neely and Hochberg will try to explain why their calls on Friday turned out so poorly.  Market did not rally then drop, nor just drop; it plateaued and is now spiking higher.  Over the weekend the G7 announced a coordinated attempt to save the Dollar.  Volcker called for raising rates, a very unusual public slap at the current Fed, also to support the Dollar.  Dollar/Euro is nearing the end of their triangle dance.  All this suggests an inversion of the primary wave count of the leading wave pundits: rather than a drop ahead, it looks more likely that Mar17 was the potential meltdown day (think: Oct 9, 2002) and the tide was turned by the rescue of Bear Stearns.  Since then we seem to be forming a distribution pattern which should lead to new highs.  (The Surge!?  Tech is *finally* showing life.)  And you can see a large inverted head & shoulders forming in the S&P (a distribution pattern) which would predict that the S&P would eventually get back to the 1520 range, crushing through even Neely's ultimate line in the sand of SP1475. 

Comments

[TraderT]

It always amazes me that people try to use EW as a predictor rather than just a study of the emotions of the market participants at various points in history, ie: a historical perspective.

All that we can ever know is that a market will trace out an elliott pattern. What we can never know, with any certainty, is which of the 13 or so elliot patterns are currently being traced out.

To make money in any particular market generally requires one to be totally "directional unbiased".

The market is always "right". If you want to make money, you need to get "right" the market.

[Upstart]

I think Yelnick is right about the surge. And Carl Futia was correct in likening the Oct.-Jan. decline to the 1998 LCTM drop - the final pullback before the surge to the final high, in both cases.

[Mamma Boom Boom]

I am elated that Volcker has decided to speak up. I have a lot of respect for him. Someone needs to save us from these monkeys in the white house, congress, and the fed. The incompetence they have displayed in the past few years has been amazing.

As for a new high, I eluded to that possibility on my website, yesterday. I wasn't very serious, just mentioned it as a possibility. If the S&P rises above 1396, I'll become serious.

It'll be interesting to see if Neely is ready to back-peddle, yet. Don't get me wrong, I respect his work.

[Hank Wernicki]

It's all a big fractal ................. Elliot just names 13 << hello

There are so many others ..................

Hank

[wavechart.com]

I would like to invite any of Yelnick's readers who are interested to visit the new subscription site at http://www.wavechart.com/subscribers. The temporary username/password is temp/five. Yesterday was the first update.

[Canadian Money]

I'm curious. Does anyone recall if Prechter or Neely recognized the SP500 market turn... at the bottom in late 2002? That Bear period (2000 to late 2002) appears to be at least as fuzzy as the one we are dealing with at this point in time.

CM

[Mamma Boom Boom]

Neely stayed bearish thru about May or June of 03, then declared the the bear market was over and that a new and great bull market had emerged.

It's not fuzzy, your simply going to the wrong places for info.

[Hank Wernicki]

The big Fractal Picture. The world is NOT coming to an End :

http://www.elliottfractals.com/YEARLY_4_14_08.jpg

2008 Fractal Forecast

[Upstart]

It wasn't that fuzzy in 2002 to people like Jim Rogers who understood the 4-year cycle. Prechter was so blinded that he ignored the cycle, and ignored the 20-year cycle (which bottomed at the same time) in his own book "At the Crest..." The caption on his 20-yr. cycle chart showed a major low due in 2002, + or - one year!

Does anybody else here think that Prechter's biggest failure ever was, when confronted with a clear corrective pattern from 2000-2002, he kept insisting on labeling it a first wave of a bear market? This coming from someone who once said that above all else we must listen to what the waves tell us. The waves clearly said "correction; new high coming."

Nevertheless, I have learned other useful things from Prechter. One is the existence of the 3.3-yr. cycle. I'm using that information currently, as that cycle was due to bottom about the time of the recent lows.

[K Greene]

Yelnick and everyone,

Check out this chart of the Dow Transports....

http://www.financialsense.com/fsu/editorials/yu/2008/images/0330203.gif

[Jojo]

The Fed model says the fair value for the SPX is around 2767.00

100% gain is very possible for the SPX.

Here is the article:

http://seekingalpha.com/article/71345-fed-model-update-stocks-are-cheap-compared-to-bonds

[TObject]

Hank Wernicki I get a virus warning if I go to your site
Avira Antivir

[TObject]

Hank Wernicki, I get virus warning on your main page "HTML/Infected.WebPape.Gen"
The heuristic detected a suspicious file.
For a more detailed analysis you should send the file to us. Please
send the file via quarantine manager.

Contains detection pattern of the HTML script virus
HTML/Infected.WebPape.Gen

[wow]

Fed Model Update: Stocks Are Cheap Compared to Bonds
John Gilluly April 07, 2008

I thought that it would be good to compare the current bearish mood of the market with the Fed Model used by the Federal Reserve to measure the value of the stock market.

It is the uncertainty of stocks and the guarantee of the bond that creates the competition between stocks and bonds. If bond yields are higher than stock yields, investors will likely sell a portion of their stocks and move that money into bonds. When stock prices decline to the point that the SPX yield is higher than bonds, investors will allocate more capital back to stocks.

Bonds thrive in a weak economy because investors seek secure returns. But in an improving economy, money flows from bonds into stocks. At the prospect of a stronger economy, the yield on 10-year U.S. Treasury bonds rises sharply. As the yields rise, the value of the treasury bonds drop.

There is a long-term relationship of the 10-year Treasury yield running approximately equal to the forward earnings yield of the SPX. (The earnings yield is the inverse of the P/E).

The formula for the Fed Valuation Model is as follows:

(10 Year bond yield minus [-] SPX earnings yield) / SPX earnings yield). Where the SPX earnings yield = ( SPX earnings estimates/ SPX index price).

Currently, the S&P 500 is selling at 1370 and has projected 2008 operating earnings of $96.28 per share. Converting the $96.28 in S&P 500 earnings to an earnings yield gives us a fair comparison to the investment value of the bond yield. Dividing the S&P 500's earnings ($96.28) by the price of the index (1370), we get a yield of 7.03% ($96.28/1370 = 7.03%).

Assume today's 3.48% yield on the 10 year treasury bond:

1. Convert this yield to a P/E multiple (100/3.48 = 28.74 P/E)

2. Take this 28.74 P/E and multiply it by the operating earnings of the SPX ($96.28) and you get a fair value of 2767 for the SPX 500.

With the 10-year note currently at 3.48%, stocks are undervalued by 50% for 2008 estimated operating earnings. The current operating P/E of 14.23 represents very good value given current interest rate levels. 2008 estimates are for a 7.03% SPX earnings yield compared to a 3.48% yield on the 10-year note leaving a spread of 355 basis points between the two yields. (rev. 4/5/08)

An additional calculation is also necessary. The yield on the Treasury bond is guaranteed, but it is also fixed. SPX earnings grow an average of 7% per year (the mean average for the last 60 years). If we project growth out into the future and take into consideration that inflation will decrease the value of that investment by (-3.5%) per year, the fixed yield on the bond is currently a negative return. The SPX earnings yield, however, is growing an average of 7% per year, more than compensating for the effects of inflation (7% - 3.5% = 3.5%).

In today's market environment, an investment in the SPX far exceeds the value of the Treasury bond for future returns. Common sense would lead an investor to place his money in equities because stocks are spectacularly undervalued in comparison to bonds. You have to go back to 1974 to find this degree of undervaluation. [b]This is the exact opposite of stock/bond values at the height of the 2000 dotcom boom. [/b]

[b]To put this in historical perspective, the Fed Model has only sold at a discount exceeding 20% four times in the last 26 years (1979, 1980, 1993, 2002). It is currently selling at a 50% discount and there has been only two times in 26 years that it has sold below a 25% discount (1979, 1980). This means that if the SPX were to rise to its Fed Fair Market value it would increase 50% from current levels. The risk premium for stocks in this environment is very favorable. With the forecasted 2008 SPX earnings, the upside potential clearly outweighs the downside risk. Stocks are cheap when compared to bonds; plus they beat inflation and yield more. [/b]

The Corp. AAA Indus. Bond rate [AAA] is currently about 5.4%. The earnings yield on the SPX is 7.03%. The growth of SPX cash earnings has averaged 3% to 7% over the past 50 years. The current cash earnings yield on SPX stocks is thus 1.6% higher than an AAA bond (the highest guaranteed corporate bond yield), plus you get the growth of cash earnings on the SPX (which next year is estimated at +9%).

[TObject]

K Greene
how qabout big H&S one?
http://paintfantasy.com/images/tranhs.jpg

[Tom CZ]

re Fed model - ok model and how robust?

as far I know it is used but the functionality is really questionable because:

1/ model doesnt take into account dividend payout ratio which is falling through the past years - think now around 1,9-2 on INDU from 3-4 before

2/ it is really funny to compare safe haven government bond yield with general market corporate yield in the environment with much wider credit spreads on corporates and more negative asw spreads on treasuries

3/ also it is much harder to set the approriate lvl for long treasuries as we know they were determined few years ago with structural demand from eg china funds etc. been called conudnrum by big Alan

- all in all it is hard to trust to the Fed model then but have to accept that people lking to it

[TObject]

But at the same time, this raises a lot of questions on how real are the past earnings reported by both Wall St firms and hedge funds with large CDO profits. For example, if a hedge fund manager can trade minor reduction of profit (from 50 to 30 bps) with an immediate bonus of 10 times (1 vs. 10 years) paid today, what would he choose?

http://www.safehaven.com/article-9994.htm

[Hank Wernicki]

My site is Hosted by GoDaddy.com <<< Not possible to have a virus

Nice Joke

Hank

[TObject]

Hank, I don't joke about viruses
here's the screenshot of a virus warning I get on your website
http://paintfantasy.com/images/vi1.jpg

I use Avira Antivir - you can download it and test it yourself.
And you better call WhosYourDaddy or whatever

[Hank Wernicki]

Ok I will thank you .................. that is I'll call my host provider ..

Hank

[Voice of Reason]

Hank and TObject,

It's important to understand how web sites and web browsers work.

Godaddy.com simply sends out the content for http://www.elliottfractals.com.

Hank placed that content there somehow.

TObject used his/her browser to ask for the content at the given address and saw a virus warning.

There are three possibilities:

1. TObject has a virus and it shows up when accessing Hank's site.
2. Hank has uploaded a virus to his site at Godaddy.com
3. Godaddy.com is somehow introducing viruses as the site is serving data.

All three need to be checked out.

I see no problems with accessing http://www.elliottfractals.com and viewing the JPG at the given link with a Windows machine protected by the latest Norton Antivirus.

This strongly suggests that scenario 1 is likely to be the situation suggesting that Tobject has a virus infestation and that his/her antivirus solution is suspect.

[TObject]

Voice of Reason, dude, I have 20 years of IT experience and my system is clean!
I actially have 2 AntiViruses running 24/7.
Norton Antivirus can't catch everything
Anyway no need to include you cheap 5 cents in every conversation.

[Suzy]

Wow

You and John Gilully need to read the section on stockbroker economics in the book by Andy Smithers "q ratio - valuing wall street". You will realise that the bond yield ratio as a means of valuing stocks is rubbish and just another con used by stockbrokers to sell stocks.

This ratio is up there with P/E in terms of its ability to predict the future - that is, NONE!

[Hank Wernicki]

Number 1 I was the MIS Director for the Largest Medical College in the country.

And I teach Computer Science at the University of Pittsburgh ...............

I see no problem with the site ............ 20 years of IT experience ..

It's probably your anti virus program and not the site ... but thank you for your heads up

Hank

everything is fine Sir

[TObject]

Maybe it was this one: "Another round of mass SQL injections going on which has infected hundreds of thousands of websites.

http://www.f-secure.com/weblog/archives/00001427.html