The STU made a clear comparison to the market in 1938. Kudos to Da Bear, who commented on this in the prior post, and noted the odd behavior of wave (5) then and now - a very small 4th wave. The STU has more than this chart, and their other charts are worth reviewing, and suggest that we should retest the 2-4 line (the upper trendline that connects the tops of waves 2 and 4), meaning a fall of around 50 SP pts. Not required but would match 1938.
If we are in 1938, then after the test of the 2-4 line, we should have the expected multi-month rally to above Dow10K and SP1050.
Next week should clarify. Other charts and possibilities and an analysis of sentiment readings, below the fold.
The STU tonight also gave supporting evidence of the big wave [2] underway. Yet, they also show the alt count in the Naz as a large wave (4) flat which may have just ended. This or a triangle wave (4) remains a lower probability but still extant count for the major indexes as well.
I gave a fairly concise summary of various wave count options in a comment to a question in the prior post. You can read it here. It lays out much of the case for the start of wave [2]. We can begin to eliminate some of them, particularly if we get a pullback to the 2-4 line next week. The top count now is that wave 1 of A of [2] ended two days ago, and we are in a wave 2 pullback, having just done subwaves a and b. Wave c of 2 may retest the 2-4 line.
Two alternatives to watch: if we break the 2-4 line and head south, the Naz count may emerge as the top count - that we finished a wave (4) flat and are headed down in wave (5). If we instead have a pullback then head north, but in a sloppy, meandering way, it may mean we are still in a wave (4) as part of wave C (if a flat) or leg C (if a triangle).
Now, some contrary indicators.
Sentiment. ‘Everyone’ has been waiting for this wave 2, since they see a big 50% wave 2 also occurred in 1929-1930. When everyone is on one side, go to the other. What actually happened is the market did a head fake on 'everyone', since the Nov21-Jan6 rally looked like that wave 2, and fit the 1929 narrative, but it wasn’t. Prechter said it was a fakeout, since the count was wrong (not yet a five wave pattern down), and proved correct.
You can see this ‘everyone’ sentiment in the CBOE put/call ratio. This is a great contrary indicator. When puts are much higher than calls, it shows a disbelief in a rally, and the puts get caught in a short squeeze. Hence a sharp rally follows. In contrast, now you have many more calls, meaning traders are worried about missing the bottom. This reflects that ‘everyone’ expects the big wave 2 rally.
The CBOE put/call ratio has closed at really low levels four times: Dec21, 2007; Feb9, Feb21 and Mar10. The other three times it meant a fake rally and a drop the next day or so. In contrast, the bottoms all the way down such as Nov20 and around Sep15 all had high levels of put/calls.
This indicator is still negative on a big rally.
Volatility. The VIX is not yet confirming the breakout. It is right on edge, in a triangle.
Core Holdings. The rally so far has been largely individual traders, not institutions. Institutional holdings have increased, but were really low, and now sit at a level that goes back to Oct02. If it breaks above, pile on, the rally will be strong from here on. If it fades, we have to watch to see if this breakout is also a false one.
Bernanke Nuclear Option. Now, the final issue. The bond market is very hard to read. This is because Bernanke has chosen to go nuclear and helicopter money directly into the economy by purchasing Treasuries. Normally he buys from the Treasury, creating money; then sells into the open market, removing money. This time he is buying in the open market, creating money, and not sterilizing it. He has previously weakened his balance sheet by accepting a bunch of questionable debt from banks, and maybe he wants to begin swapping that poor reserve debt out for Treasuries. But his stated goal is to keep interest rates low by paying above market for Treasuries. His goal is to lower the cost of financing the huge deficits, as well as try to restart the housing market with even lower rates.
The Fed has tried this once before, in Operation Twist from 1959 to 1966. Then the long rate was 2.5%, and had moved up to 3%, and the Fed wanted to get it down again. What happened instead is the Great Inflation of 1965-1981, and long rates rose to 6% before the Fed gave up. Put simply, the gimmick of Twist created the inflation, rather than lower borrowing costs. In a nutshell, a disaster.
The Brits began the same idea several weeks ago, and a couple of days ago were unable to sell out their version of Treasuries, called Gilts. The Brown government may fall over this.
The Fed auction yesterday was ominous. Very weak auction. Foreign buying was down 50%. You have to believe the minute the Fed made offers to buy above market, the Chinese among others tried to sell back. They must have had overwhelming bids.
If bond prices stay lowish, then the rally is in fine shape. If bonds peak and rates start to rise, revisit the decision to hold stocks. My bet is that the rally goes several months, and the Bernanke Gambit works for a while, then begins to fail. And the market begins to fall. Hence watch the bond market as a leading indicator of stocks.
da bear,
two things for you,,,
You are kidding about the 1938 Dow drop, right?
I don't know from when your claim to be the first person who brought up '37 to '38. But October was a recent time when I saw some posts on boards and forums. I've also look for comparisons to at reverses at beginning of the 1930 rally, the '73 to '74 decline and the post '74 rally (I favor that '74 to '80 formation next year or two).
if you look close enough to the actual daily data for the '38 segment and separate each wave, its real value is the 4th wave.
MRCI has tools to compare previous shapes and forms if that is your interest.
Second, about 95% of tulips have no smell. :))
wave rust
Posted by: Wave Rust | Monday, March 30, 2009 at 08:47 PM