Equities and Bonds Fade the Fed - Is Santa Staying Home?

The Fed acted predictably and held steady. Stocks reacted predictably, albeit with less volatility than normal, by rising into the announcement and falling after. (You doubt it was predictable? Neely quite cleverly put out a bulletin this morning recommending to short the March e-mini five minutes after the FOMC release.) The 10-yr Treasury rose to 3.6%, the highest since August 2008 (!), and the TIPS jumped to over 2%, giving it an implied ten-year rate of 2.3%, also the highest since Aug08 (!!). 

The Fed modified their statement (click on markup, courtesy SeekingAlpha) to suggest their exit strategy is quickening, and QE may be through by the end of Q1. This may cause mortgage rates to rise by 35-50 bps above the 10-yr, which itself seems poised to rise. Good thing Bernanke refinanced his option ARM - which blew up on him - into a fixed 30-yr mortgage at 5%. 

You can find tea leaf readers looking closely at the changes in the statement above. It appears some pessimism has crept in regarding housing and employment. 

Stocks remain in a stall, but I still believe in Santa. Let me run though my Santa Rally Update with a series of charts.

This first chart from Jesse's Café Américain show the sideways action since Nov. Note the resistance at the green line around Sp1114. He makes no prediction of Santa, but notes that corporate bonds may be a trap about to spring shut, given the rate rise in Treasuries. 

  

This second chart from tonight's STU shows that in the Wilshire 5000 the sideways action goes back to October. They point to two sentiment indicators that signal caution: 

• Bernanke as Man Person of the Year on the cover of Time. News weeklies tend to highlight an event as the trend is near the point of exhaustion. Jeff Bezos made the cover in Dec 1999, for example. A great list of auspicious covers is provided by Mish. Other pundits today highlight a similar cover with Greenspan, Rubin and Summers, also in 1999. Paul Krugman will publish a column tomorrow with the same picture, saying "Be afraid. Be very afraid." The STU continues that usually the trend exhausts and reverses within a month - just as our Santa Rally predicts!
• Investors Intelligence Advisors Survey has gotten above a 75% bulls ratio, a ratio last seen in Oct 2007. Put more simply, the ratio of bulls:bears is above 3:1 at 3.13, within scratch of the 3.16 ratio at the all-time top. And with a Santa Rally, it might get even higher. Time to buy? Hmmm. 

 

Tony Caldero has modified his count to make the sideways move a flat instead of a triangle. His count says we have finished wave B of a zigzag up, and targets wave C to rise to around Sp1160. He believes in Santa! 

Given that in zigzags the A wave is typically the sharpest (whereas in flats it is the C wave), we should expect his wave C to somewhat meander upwards for at least the time of A (2 weeks) if not 1.6x of A (a little over 3 weeks, plus a few more days for all those holidays in between), which puts the end of C around the first week of January - or right where my Santa Rally should end! 

 

My take: the Santa Rally into the first week of January seems still on. The next couple of days get us to options expiration Friday, so volatility is to be expected, likely up tomorrow and down Friday. After that the historical data says watch the rally! I have recently posted a 37 year seasonal chart showing the Santa Rally. Here is a 110 year chart showing the same pattern, with the Santa Rally typically starting on Dec21 - next Monday! Ho ho ho!

 

Comments

[joe]

Yelnik, I really admire your sense of conviction - I do. I see your count and it makes sense too. But count is not that strong and the seasonality associated with December rallies - I don't see it here.

Maybe the pertinent question is - what happens historically in December when the market rallied 60% during the year and off a dynamic low?

Point being - I think we are in unchartered ground here. What I do see (alot lately) are people that were burned badly last year, made some money trading this year and will sell loss positions right now to keep from paying taxes on those gains. For the most part, they are just glad to have gotten some of those losses back. Observation is just based on my practice, to be sure.

We will find out soon if santa is still coming or he already came and went. I think he left the building -at about S&P 1120 - at least for now.

Another well thought out and written post, sir.

Joe

[joe]

Do you remember about ten years ago - many mutual funds had taxable gains for the year but from the begining of the next year they ran big losses? Do you remember how pissed off people were that they had just lost a lot of money but still had to pay taxes on those "phantom gains?"

Many people remember that painfully well - there was a great lesson coming from that experience - not lost on mutual funds or individuals that got caught in it.

[DG]

Yelnick,

I was also considering a Zigzag off the November lows and still can't eliminate it completely, but the move up from the December 9th low, if it was an Impulse wave, even if only part of one, would have made a new high by now, according to NeoWave logic, which says that an Impulse should retrace Corrective waves faster than the Corrective waves happened, but the move down from the December 4th high to the December 9th low was 15 78-minute bars and the move up is already 30 and hasn't made a new high. If we area in a Zigzag, wave-B is still forming or didn't end at the price low, although at the moment there really aren't any good candidates for where it would have ended otherwise.

Plus, look at the Russell 2000 off the December 9th low and you'll see that the initial thrust up was deeply retraced, unlike the minimal retracement on the SPX, indicating that the action in that index wasn't an Impulse, either, even though it's been leading and made new highs above the December 4th high without the SPX. If the Russell's not in an Impulse and it's leading, I highly doubt the SPX is in one.

I've got a non-Zigzag count that seems to make sense. We'll see if it plays out. It's the same count that says we have to stay below 1123 (posted the exact numbers in another thread), so if it breaks, it'll be easy to know.

[joe]

If the Russell's not in an Impulse and it's leading, I highly doubt the SPX is in one.

Strong point.
Joe

[joe]

The dollar is on fire here!

77.51 - and up on almost every single currency. Euro broke 1.45 support pretty convincingly.

[Roger D.]

All you bulls feast your eyes on this high level distribution top in the Global Dow no less.

Weepy

Roger

http://www.screencast.com/users/fast996/folders/Default/media/89a9f2f9-3c9e-4e2a-b256-114dd6949ebe

[joe]

You were dead on the nose on the dollar Roger. Kudos.

Joe

[joe]

Dollar keeps making new highs tonight. Next up futures contract is almost at 78 now.

If you were short on the carry trade - they will have to start unwinding - pronto.

[Mike McQuaid]

The NDX has cleared the golden mean retrace of the '07 high to '09 low while the DJ Transport Index has touched the corresponding line on its chart.
The SPX is reacting by bumping 50% retracement resistance of those dates while showing tight Bollinger band (20,2) width of 29.46. SPX has had only slight percentage retracements since the March reversal characterizing the pattern as bullish. The pattern has also used time as much of a correction as price, casting the pattern as bullish. The trend continues.

[yelnick]

DG, I believe the start of the C wave of the zigzag need only be faster than the prior correction, which since it has been sideways is much slower than its last leg. Maybe Neely's rules are different here. For Zoran, we need to see a bifurcation of the plateau, which has not happened, to confirm the break up. Also, in all their theories, a move out of a triangle needs to be fairly sharp, and you are right, this one is rolling over already. The EWI guys I think are expecting a truncation - means wave 5 is already over!

It is reasonable to think we are still in the sideways correction, at least for a couple more trading days. In the S&P there is a clear plateau (range) since mid-Nov. It counts as five waves (triangle) but it also counts as 3 waves where the first leg of the triangle is a flat that ends on the second leg down. Then the rise into Dec4 is leg B and the drop to Dec 9 is leg C. We would be in leg D, and for timing to work, it should already be rolling over into E. That might be the next two days we have E and bang we THEN start the C wave.

Tony Caldero has an alternative that still gets to Sp1060 within a few weeks. Count this as a flat ending Dec9. (See his chart.) We are in wave 1 of C up and have rolled into wave 2 of C. The Santa Rally next week would look like a fast wave 3. Then a dip and dive around New Year's are waves 4 and 5.

[EN]

Lump of Coal from Santa is comming!

[Gwahir]

Yelnik, you're writing one of the best market blogs. Great stuff & much appreciated.

Rally as long as 10235 is not violated.

[DG]

DG, I believe the start of the C wave of the zigzag need only be faster than the prior correction, which since it has been sideways is much slower than its last leg. Maybe Neely's rules are different here.

Yelnick,

It will depend on what scale you are looking. My statement was based on comparing the move down from December 4th to December 9th to the move up since then. If the low of the 9th was really the end of a Corrective pattern and the beginning of a wave-C Impulse up, the Post-Constructive Rules of Logic Neely has developed to help avoid false reversals (like all of wave theory, it isn't perfect but it's useful) would say that we should have covered that same amount of ground (SPY 112.38 to 109.02 or 2.36 SPY points) to the upside faster than it took to cover it to the downside. Since we haven't, we are either still in the correction or something else is happening.

So, just focusing on the question of whether or not a wave-C has begun, I have to say the answer is no. That's not to say it can't begin today.

[Ed]

Yelnick,

To be fair, Neely did indeed say to short the March contract 5 minutes after the Fed annoucement, but he said "If the March contract breaks 1080", which of course it didn't...So you can't give credit to Neely about shorting the strength.

[Roger D.]

I expect a move down to 1088 and maybe below 1082 tomorrow. This is the grand daddy of all "C" waves here.

Once this wave bottoms and I'm talking multi days down. We should have a sharp rally up retracing 50-66 pct of this drop.

Then the "Gates of Hell" will open up to the downside.

Bulls you have been warned.

Bears your salvation is at hand.

[Michael]

Today, Fred Smith of Fed-Ex is once again reiterating 4% GDP growth in Q4 and 3.6% for Q1 of 2010.

[joe]

The market has better than 10 to 1 D to A now. It is selling off. If its what I think its from it will continue for days.

Roger- we are on the same page here.

DG - I would like to read Neely on false reversals - it is an interesting concept he has.

Joe

[Dave]

All of you Santa rally folks are feeling this dollar rally now, aren't you. Its not like you did not see it coming. I say again. Learn it. Know it. Live it.

[joe]

DG - this volume move really suggests reversal to me.

What would Neely say about this kind of volume movement? I apologize about being so unfamiliar with Neely.

[DG]

joe,

The explanation of the logic behind it is in Mastering Elliott Wave, chapter 6.

As of right now, probably the only way we could be in wave-C of a Zigzag is if that wave-C is forming a Terminal pattern. If that's the case, it buys the bulls some time, but means that the rally won't make but a possible marginal new high. If we took out the 12-9 SPX low, that would get ruled out pretty strongly. However, since wave-B didn't retrace as much of wave-A as I would expect in a situation where a Terminal was forming, I give that low odds.

This Question of the Week response also gives some background on what Neely wants to see if a reversal is real. It's a combination of price and time.

In past NEoWave TRADING reports you have talked about market declines being faster than rallies or vice versa. Can you explain how you determine such things?
Answer:

It is a NEoWave axiom that markets always move the fastest in the direction of the psychological trend (which can be independent of the price trend). For example, if Gold rallies $100 in 100 days, then declines $50 in the next 100 days, the psychological trend is up.

Where NEoWave diverges from orthodox Elliott Wave, and most practitioners of technical analysis, is that this concept holds true EVEN IF the move in the direction of the trend is smaller. For example, if Gold rallies $100 in 100 days, and then is followed by a $150 decline over 200 days, NEoWave still assumes the psychological "trend" is UP because the $100 up move has a greater price/time ratio. Under NEoWave, the faster $100 move is "with the trend" (probably wave-A of a Flat in this case) even though it is smaller in price. The $150 move is slower, so usually "counter-trend" and will probably wave-B of a Flat in this situation.

When I study wave charts, what is MOST important and what I look for first is the largest, fastest move on the chart. That is where I then begin my analysis. From there I make the assumption that largest, fastest move is WITH the trend (which means it must be wave-1, 3, 5, A, C, E, G or I and cannot be wave-2, 4, B, D, F, H or X). By applying time and retracement rules to what is left, you can almost always begin your wave analysis from the right place with the correct labels. This is the reason I virtually never have alternate wave counts on my Forecasting services (unlike most orthodox Elliott Wave practitioners) and why my wave counts usually stay on track for such long periods.

[DG]

What would Neely say about this kind of volume movement? I apologize about being so unfamiliar with Neely.

Neely doesn't really look at volume, except in a very broad sense, e.g. he saw the increased volume in the 1990's as a piece of confirming evidence that the move into the 2000 high was a wave 3. I've never seen him refer to volume that I can recall, when it came to making a short-term trade recommendation.

[joe]

Thanks DG - and you have convinced me I need to read that book. Looks like its about 50 bucks at amazon.

Joe

[DG]

joe,

I think it's worth every penny and then some. Just don't try to read Chapter 3 straight through the first time around. It's way too detailed and a lot of readers give up on the whole book just because of that one chapter. It's really meant to be a reference chapter.

[da bear]

DG,

That makes a lot of sense. So gold then is in a confirmed downtrend.
Gold's down move can't be a good sign for stocks. Deflation is back.
Party like it's Christmas 1930!

da bear

[Penny Stock Lists]

Penny Stock Lists are just as good in my eyes. You can start with a small investment and see how the advise pans out. Inevitably if you start spreading the investment on more undervalued penny stocks, you're going to see a great upside in gains.