Planet Yelnick

Seasonal Pattern, Swine Flu and the Four Year Presidential Cycle

Sy Harding is the prime advocate for a seasonal investing pattern: buy in November, sell in May.  He gives more precise timing then that to his subscribers; and he simplifies decisions to twice a year, in and out.  He shows his record on the blog, and it is astonishingly better than playing the market index funds (buy and hold).  He also follows the most predictable cycle, the four-year cycle driven by Presidential politics, and last weekend Barron's published his take that THE low may be as early as Oct 2009, and may be not much lower than a retest of the Mar6 lows (see Thank You, Mr. Obama). 

Yesterday he said the swine flu scare would likely cause a correction; this wasn't yet the definitive sell-in-May call, but close.  Today the market was up strongly, and Neely sent out an emergency update that the market is more likely to runup as far as SP950 or SP1000 before it has a serious correction.  Is it time to get out, or time to get in?

Targets for the Pullback

This pullback should go back to the start of the ending diagonal, or SP780 and Dow7400.  BTW some ewavers do not see us in a wave [2] counter-trend rally, but see us as finishing up a large wave (4) as part of the down move since Oct07.  Yves for example asked me to post this bulletin:

We are at a critical juncture. The market has not exceeded the top of wave B at 8400 on the Dow. It thus reinforces our strong belief that we have finished wave C and completed wave 4 of higher degree.  Prepare for going long,  fear and volatility.  Stay tune for next update on timing sequence  

Also, below the fold is Robin Landry's latest:

Squirrely Market, Pullback Still On

We hit the classic Fib 50% retracement today in the S&P, a good indication the pullback will resume tomorrow.  We *might* edge up to the 61.8% retrace first, so if not a drop at the open, watch for a small intraday high around SP857. To pour some fuel on this fire, Neely sent out an emergency bulletin for his traders to lighten up on the long position at the current futures level (June 842).  The STU last night also went through a long analysis of why we are in a pullback for several weeks, to be followed by a continued rally into the summer. 

The wave pattern so far looks like a zigzag wave [2] correction off the Mar6 lows.  We have completed wave A of the zig, and the pullback is wave B.  Wave C will go to new highs, but rise slower than wave A.  Hence after this current selloff, expect a lumbering, somewhat sloppy upwards rally into the summer, maybe as far as August.  A typical wave [2] would retrace 50% of the whole fall since Oct07, and crest Dow10K.  Sentiment during a wave 2 is often an echo of the bubble peak, so expect shockingly bullish sentiment.  Don't be surprised if Obama gives a "Mission Accomplished" speech, saying his Porkulus Stimulus worked, and we don't need another one; and that the recovery is on.  That is the point to go short!  Stay tuned, this could be fun.

Ending DIagonal

After poo pooing it all week, the STU has now come to see the current wave action as an ending diagonal C wave of an ABC correction since Mar6.  An ending diagonal is a triangle-like pattern in fifth waves or C waves, the end of a wave pattern, meaning the market has come "too far, too fast."  The STU notes that "[t]his concept certainly applies to the current rally leg, which has closed higher for six straight weeks in the strongest advance in 76 years (since 1933 in the S&P)."  If this is an ED, it will reverse promptly - Monday most likely.  This is not the end of wave [2], but an X wave of a longer upwards corrective pattern.

The STU keeps open an alt count, where we are about to take off in a strong wave 3 up.  Neely also has a similar 'it could go either way' view: a strong final rally, or a correction that is fairly deep.  Both say to watch the first few days this coming week for guidance.  Sometimes when the wave pattern is ambiguous, best to stand aside and let it clarify. 

Deflation is the Green Shoot Sprouting

Obama is trying to read the tea leaves and sees "green shoots of recovery" poking up.  Today Neely sent out a bulletin to note that deflation is finally showing up in the stats.  Despite the huge attempt to reflate the currency by Bernanke, and the financial stimulus, the destruction of credit continues unabated.  More on this here and here.  And Prechter of course has been saying since 2000 that the Fed will not be able to stop deflation.  I will repeat what I have written previously, due to its seminal importance: 

I reread Conquer the Crash recently, and was blown away by Chapter 13, which lays out why the Fed cannot prevent deflation.  While Prechter has provided his thinking to his subscribers, I asked him for permission to distribute Chapter 13 to my readers, and he graciously agreed.  I would urge you to download and read Chapter 13, excerpted from his book, especially when you see in the news and columns drivel like "no one could have predicted this."  They could, and they did. 

What Prechter wrote in 2000 is pretty much what has been tried for the past 18 24 months, to no avail.  How can we expect bailouts and reflation of under $2T to forestall a credit debacle of $52T?  Global credit grew $24T over the Greenspan Indian Summer period on a paltry global GDP growth of $10T, so at least $14T will come crashing down; plus we already were highly over-leveraged across the global economy in 2000. 

Once we accept that the party is over, we can begin to get serious about how to reset the economy.  A lot of it is time and taking the pain.  And we should not forget the wisdom of FDR's Treasury Secretary Henry Morgenthau, who testified in May 1939:

"We are spending more money than we have ever spent before, and it does not work. ... I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. ... I say after eight years of this administration we have just as much unemployment as when we started ... and an enormous debt, to boot."

I don't think he was any more a Keynesian. 

Distribution Indicates Topping

A friend noted last week that the market seemed to be in an odd pattern, as if the program trading bots were scrubbing near the close and fleecing the small investors. Then this Friday Zerohedge provided the analysis to explain what is happening: The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans.   As he is wont to do, Karl Denniger nails what this means:

 "Volume has been thin and declining while machine-driven ("quant") trading as a percentage of total volume has been flying higher. ... There have been a series of overnight 'gap higher' moves in sequence followed by days that fail to follow through strongly (that is, larger than the overnight gaps.)  This is abnormal and points to "at the margin" price changes. ... this is unsupportable over the longer term as the actual base of equity trading; "long-term" owners such as individuals and pension funds are NOT following through during market hours

"[T]he retail bag-holder, wind up with the shares at the end of the day, and the institutional and quant-driven "fast money" departs with your cash.  When they stop their high-frequency "pass across the table" game, and they will, you find yourself with some very expensive shares as the floor disappears." 

When will this occur?  Back to Zerohedge:

"The quant trader I spoke to would not commit himself to any specific time frame but noted that a date as early as next Monday could be a veritable D-day."

Retest Coming of the 2-4 Line

When the market drove up above the upper trendline of the whole drop, the so-called 2-4 line since it connects the tops of waves 2 and 4, it confirmed a trend change which should run for several months.  It has stalled since then, in what Zoran Gayer used to call a "thrust and a plateau."  This raises two issues: first, the Neely view, that after breaching SP850 it will fall, perhaps in a sloppy way for a while; second, the STU view, that we are in a correction that should go back and retest the 2-4 line.  You can see this in this chart which reprises the 1938 market.  The plateau has caused the STU to switch their alt count to the prime count, that wave 2 of [2] is breaking as a flat and we are in wave c.  Expect this to go at least below SP780 and Dow7438, if not all the way to the 2-4 line, which is heading below SP750 (as a declining line, it drops every day).

The 1938 Analogy Continues

We have been following the 1938 analogy closely.  See this prior post.  The market has approached the 2-4 line, the upper trendline of the whole wave down from Oct07 to Mar9, and bounced.  One of two wave actions is expected: a strong run up continuing, or a second test of the 2-4 line.  For wave counters, we are in either in wave 3 of [2], or wave 2 of [2] is breaking as an ABC where a final C wave to retest the 2-4 line is ahead.  Odds favor the first count, a strong run-up towards Dow10K. 

Neely today had to pull last night's short recommendation, and now is standing back.  He had been calling this pretty well on the way down, but in late Feb, just before the Mar6 bottom (intraday) / Mar9 (closing), Prechter put out a bulletin saying time to get out of short positions, the wave [2] bounce is nigh.  My view of Mar9 was it was a bear trap, not a bull trap - the bears would prepare to short what thought would be yet another failed bounce, and would miss the great Obama Hope Rally.  This seems to have happened, as many bearish pundits still expect this rally to fail.  Prechter and the STU are now in the catbird's seat, and remaining firmly bullish for a multi-week or month rally.