A Cluster of Historic Firsts Presage a Final Stock Surge

Monday should be a fun day.  Consider this cluster of events:

1) GM is the first Dow stock to go bankrupt.  As Friday's STU begins:

"Monday will be a historic day for the Dow Jones Industrial Average. It will mark the first time in history that a Dow component declares bankruptcy, which is what is purportedly scheduled to occur with respect to General Motors. The impending bankruptcy declaration shouldn’t be a surprise to EWFF subscribers who’ve been reading us for awhile.

[They have been predicting this since 2002] ...

"GM stock has been in the DJIA for nearly 84 years, second only the General Electric. But come Monday, Dow Jones and Company, the keeper of the venerable index, will have to remove the stock, if it does in fact declare bankruptcy. Will it be the only change and what will replace it, or others? We obviously don’t know but some astute analysts think that since the Dow is price-weighted, and since GM is less than $1 (having a negligible impact on the index’s daily change), whatever replaces it will create a more volatile stock index. We shall soon see."

2) The Treasury Yield Curve got steeper than any other time on record. 

Obama's grand plans are already running afoul of the bond market.  We have come out of three fairly disastrous days for Obama.  The bond market has not cooperated.  Long bonds have risen 1.4% (10-yr) this year, as foreign buyers fear hyperinflation, and have moved to the short bond.  Rising 30-year rates have pushed up mortgage rates to 5.5% and higher, killing any vain hopes for a housing recovery based on more credit.  The Fed has been buying agency paper and Treasuries in an effort to drive the mortgage rates down to 4%.  No chance of that. 

We are seeing history repeating.  In Clinton's first term 15 years ago, he tried to push through 'stimulus' bills and nationalization of healthcare, and the bond market did not cooperate.  He had to back off, and for four years (95-98) he was as good a Republican President as we have had!  Better than W turned out to be.

Will Obama see reality?  Not at all clear;  I expect him to rail against it first.  He will continue to see green shoots amidst the danger signs.  Oddly, his required optimism may jettison any second Porkulus bill, and we might see an improving GDP in Q3 (at least, not down as much as Q1 or Q2) as the first Porkulus finally begins to take some effect.  Avoiding more debt is a good thing, so we might thread a difficult needle and at least not worsen the plight.  But he should have problems in Congress with his spending schemes, including healthcare, given the difficulty of funding what he has already put into place. 

The chart from SafeHaven shows the long term trendlines of the long bond, and the spike above and now rapid fall.  if the long bond breaks the bottom trendline it will confirm a change of trend.  Rates will continue to rise.  The STU has predicted rates to exceed 4.6%, which they just broke, and now seem them rising at least to 4.8%.  But if fear of hyperinflation and avoidance of funding the Obama deficits has set in, the long bond may truly break down. 

Normally bonds do well in a Kondratieff WInter, but normally the government does not due such a large and long-term spending with huge deficits.  This time the Treasuries may have already had their low rates. 

3) The deficits are now beginning to be seen as unfundable.  We either need to raise taxes 60%, or debase the USD in half.  Both are disasters for the US economy.  Or, we could wake up and cut spending!  Most likely, we are facing hyperinflation after deflation runs its course.  John Taylor, the respected economist from Stanford, has calculated how bad an inflation will be needed to get deficits back in line:

"To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

"Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

"[An] 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating."

4) We had one bizarre spike at the end of trading on Friday, suggesting a huge short squeeze.  See chart, courtesy The Market Ticker.  

Note the volume spike in light blue.  Huge!  Karl Denninger believes someone was liquidated out of a big position, since as a trading strategy this is nuts - probably cost an extra $1.25M to buy in such a fashion.  This may portend a bull rush into the S&P, and the start of the Final Surge. 

5) Oil has spiked up even though demand has not. 

This means the oil rise is an echo of the type of speculation which marked the huge rise in 2008.  A nice set of charts from the Ellott Wave Chart Site suggest the rise is over-reaction to the drop in the USD  They expect both trends to reverse - the USD to bottom and Oil to top. 

The USD broke the important 80 level on the Dollar Index.  The STU points out how sentiment is bullish on the Pound, usually an indication of a nearing trend change (in this case, USD bottom and GBP top).  You might think with all the fear of hyperinflation in the bond market, the Dollar is toast.  But it doesn't work like that.  The hyperinflation is off several years, if it comes at all; first we have to face up to growing deflation, which is now visible in all the Euro economies as well as the US and Japan.  As all major countries try to stimulate their economies with excess debt, all major currencies will weaken, and the USD is likely to weaken the least - and hence rise!  

-----------

What is an investor to do? Perhaps surprisingly, the wave count says we are about to see the final surge of this counter-trend rally.  Several weeks ago, we had a cusp point: would the market spike up, muddle along, or fall hard?  It muddled along, and this suggests a final spike is in front of us.  In wave terms, we have a pretty good ABC 3-wave up off Mar 6, with a triangle B wave through most of April.  After the C leg, we have had a second period of a trading range for several weeks, which suggest an X wave connecting two ABC zigzags.  This is now the preferred count of the EWFF and the STU.  Their opinion is informed by sentiment readings which haven't gotten bullish enough to reflect the end of this rally.  They give a potential turn date of mid-July, which matches well with some of the pretty astute comments to my prior post.  Hence a six-week runup. 

A lot of ewavers see a triangle in this X wave.  The STU is not convinced, but it remains one of the prime wave patterns.  If so, it should end with a sharp spike upwards - and this might happen Monday, a continuation of the final trading moments on Friday. 

Neely in contrast is a bit ambiguous,  He has been on and off again about the Final Surge.  He expects a huge shorting opportunity to emerge; the key is when.  If you are interested in playing the drop, I would recommend you try out his service.  It will be a tricky thing, since it may have several false starts as this market goes through a topping process.  In any event, he leaves open the possible Final Surge in his charting.  

Hence expect a summer rally at least into July, and maybe into late August.  It might start Monday, the first day of the new month, as we saw a similar strong buying pattern at the start of May and the start of April.  The wave pattern allows a rollover (down) Monday before the Surge.  Watch, and enjoy the week.  Happy trading!

Comments

[ino]

Yelnick,
Your call of a cluster of events for Monday includes 4 bad news for the stock market (GM bankruptcy, interest rates up, unfundable deficits, oil spike) against a single and questionably good news (shorts=resistance are taken out, but also a lot of long trading money).
And still expect stock surge.
Where is the logic?

[Glenn Loser Neely]

URGENT MARKET UPDATE:

We went short on friday at 909..
Please move your stops from 929 to 1500!!

We will have a HUGE crash soon... If 1500 is hit.... then Buy the market..

Glenn Loser Neely

[yelnick]

ino, market does not trade on news but on what happens next. Each of these events has a silver lining to stocks. GM BK is already priced in, and now the market can move on; and who knows, maybe it will work, but at least American manufacturing is being protected. Interest rates up would normally pull money out of stocks to bonds, but the rise indicates inflation fears, hence best to stay out of bonds. The bond market making Obama deficits hard to finance means an end to foolish stimulus and expensive new spending schemes, which is bullish. The oil spike (and rise in other commodities) looks near its end since not based on demand.

What I think is about to unfold is a joyous move into stocks, a general euphoria that the recession has past its worst, a belief in a recovery in Q4 or maybe as early as Q3, and a view that the beaten up stocks like financials are back on track. What will end this is a realization that the celebration was premature.

[Forkoholic Serge of Elliott Wave Forkology]

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[Forkoholic Serge of Elliott Wave Forkology]

"with a triangle B wave through most of April."

Yelnick, u mean MAY, not April :)

[mttoolkit]

Hey EN, email me at [email protected]

Im interested to hear how you combined River Theory with other concepts.

[Upstart]

No, APRIL saw a classic running triangle in the DOW. April is oorrect. May had an expanded flat in the DOW.

[vipul garg]

this blog is appropriately titled " final surge" if we havent seen the low.
now the behaviour will be consistent with that of structure : E of a horizontal expanding triangle... we have in store a week of massive upmove and feeling of being left out ... tgts near to 9000 on dow.

[Upstart]

I gave you the double zigzag with the April triangle being the x-wave in my post of 4/29. EWI is playing catch-up. But their timing makes more sense than my call for the top in June. A later time will make things conform that much more with the Nikkei analog.

[RNB]

Yelnick,

A small error:

"Monday will be a historic day for the Dow Jones Industrial Average. It will mark the first time in history that a Dow component declares bankruptcy, which is what is purportedly scheduled to occur with respect to General Motors..."

In 1987, Texaco declared bankruptcy and was part of the Dow Jones Industrial Average.

[vipul garg]

dg/other neowavers,
what are the rules for a large X wave regarding 1. time 2. price 3. complexity

[DG]

vipul,

I think this wave still qualifies as a "small x" because it hardly retraced any of the original move down off the all-time S&P highs. It looks like we only retraced about 23% of the original move down from the high (taking the October 2008 low to November 2008 high as the maximum extent of the retrace). While this is low from a price retracement perspective, time retracement makes it very likely these two waves are of the same degree.

As of right now, we are at a Fib time ratio of nearly a perfect 61.8% (253 trading days for the original move down from the all-time high to the October 2008 low and 158 trading days of this x-wave so far). If you take the December high in 2007 as the actual beginning of the move down, then we are at about 78.6% Fib time ratio (158 trading days divided by 211 trading days for the original move). Obviously, both of those time ratios work nicely. I don't think an x-wave can be longer in time than the wave preceding it, which I think would end up making it a B-wave instead.

On the complexity, the x-wave is usually less complex than the wave preceding it, but can be equally complex, just not more complex. Given the amount of time and subdivision present in both the original move down and the x-wave, I would say they are probably equally complex, since every wave has visible subdivisions.

[yelnick]

RNB, thanks for the correction! I got the original info quoting the STU. Today I saw articles which suggested there may have been others as well.

[yelnick]

Fork (and Upstart), we have had 2 triangles - one in April (B wave of the initial ABC up) and now the X wave we are apparently still in. More in my major post (coming).