The Economy Abides

We have a lot of confusion in economic forecasts right now. I have mentioned how in the middle of a correction, the market reaches a moment of maximum entropy, in a Chaos Theory sense, with energy flowing about evenly in and out (buying/selling). This ends with a sharp break, a bifurcation one way or the other. The entropy period reflects the market seeking order, and the break finding order.

Something similar seems to be going on with economic forecasts:

• There are V-like indicators (manufacturing, GDP, retail) surrounded by contrary indicators (real estate, unemployment, commercial loans)
• Krugman and deLong want more stimulus, and fear it is too late (see picture)
• Roubini, Rogoff, PIMCO and even Goldman Sachs think we are stuck in a slow U recovery
• Roubini adds that we still risk a double dip, as positive indicators like ISM are fading a bit, and others like housing and durable goods are down
• Shilling, Rosenberg and others expect a double-dip W

After the huge stimulus, both fiscal and monetary, we might have expected a more obvious recovery, if stimulus indeed works. The firehose certainly has some impact, but is all we are seeing it? 

We stand at a point of confusion, where this could still go either way. Maybe we have a sharp V up from here, or maybe a flat to down patch. 

The international picture is also mixed:

• Greece in trouble, the Euro in trouble? Ireland and Latvia both take deep cuts to regain solvency, but will Greece? And then Spain? 
• Japan just revised GDP down after a negative Q3 (see chart)
• UK and much of the Eurozone is skimming the treetops on GDP
• China tightens, real estate is falling hard, but inflation is climbing. Can they muddle through?

I see positive factoids like an increase in floating corporate bond issues, an alternative to bank lending, even as commercial lending is frozen. The retail numbers and revisions look positive, although a lot may be due to tax refunds and Stimulus tax credits, not a sustainable change in consumer behavior. I also see negative projections that GDP may not be that robust in Q1, which puts a damper on the V. I could go on. The factoids are, on the whole, inconclusive.

I hold with the view of a V first, then a rollover back down in Q4 or Q1 2011. Every W starts with a V. Here is the logic:

Inventory levels are quite thin. We have had declining inventory even thru Q4 - what seems like inventory rebalancing is really a smaller drop QoQ, which shows up as positive in GDP calculations. I suspect we have an inventory surprise in Q1 and maybe Q2, where we see a real increase for the first time in a while, adding to GDP and maybe making Q1 and Q2 better than the current modest expectations. Combine that with temp workers fro census, and we can seem to be well on the way to a V shaped recovery by this summer. 

Then we have the inventory rebalancing the other way, the dramatic drop in Stimulus (QoQ) and the letting go of those temp census workers - a surprising change of GDP and unemployment to the worse. We hit the Summer of Disillusionment. 

The impact of this scenario on stocks would be a flat or rising period into the summer, then a sharp break down. A lot of pundits marvel at how high the Hope Rally has bounced, but they seem to miss the broader context:

1. After a deep drop, we always have a sharp bounce
2. American businesses cut deeply, and now have reasonable earnings expectations even on modest revenue: say $75 in the S&P, which puts the PE at just 15, about average
3. The firehose of stimulus seems to have bounced us off a deep bottom

The rumblin' stumblin' rise in stocks fits this circumstance. Economic indicators remain mixed, but the trend is up. With continued concern over GDP in Q2 and a possible early double dip in Europe, stocks might just be flat more than up. I had mentioned in my prior post a possible triple top ending by late March or April, but this economic scenario suggest a slower, rolling triple top:

• First top in Jan at Sp1150
• Next top over the next two weeks at Sp1158-70
• Drop down to the range of the last major low, in July, of around Sp900
• Summer Rally heading into the Summer of Disillusionment
• Third top in late summer at around the same level as the first two tops

Comments

[Chabazite]

Good post Yelnick. FWIW I see very little recovery in the UK at the moment. The banks were saved but we have made almost no progress since then. Here are some headlines published over recent weeks:
- Mortgage agreements 'halved in January' http://news.bbc.co.uk/1/hi/business/8563243.stm
- UK retail sales suffer sharp fall on snowy weather http://news.bbc.co.uk/1/hi/business/8523617.stm
- UK industrial output falls 0.4% in January http://news.bbc.co.uk/1/hi/business/8559389.stm
- UK trade deficit widens to biggest in 17 months http://news.bbc.co.uk/1/hi/business/8557200.stm
- UK jobs market 'still on the ropes' http://news.bbc.co.uk/1/hi/business/8515257.stm
- GDP growth will be slower than forecast, says BCC http://news.bbc.co.uk/1/hi/business/8552522.stm
What is absolutely STAGGERING is that Gordon Brown, our PM who must take his fair share of blame for the mess the UK is in (13 years as Chancellor and then PM) stands as good a chance as anyone for re-election within a few weeks. The people have been deceived into thinking that 'one more roll of the dice' and everything will get back to normal. Hmm. Pigs might fly.

[Mamma Boom Boom]

>Mamma B B:

I am curious as to why you asked the question? You must be thinking of something that connects todays situation back to the beginning, and where it might wind up.

ns

Posted by: nspolar<

You are correct. I have always been under the assumption that the most recent bull market started in 1982 and ran until 2000. Since then we have had an A(2000-2003), a B(2003-2007), and are now somewhere into a C wave correction of that bull market. But recently, I have come to change my mind. I now think the structure that started in 2007 is completely independent of past structures, it's a whole new ball game. And that 2000-2007 was some kind of failed or truncated wave off the entire bull market.

If I am correct, technicians are going to be very lost in the years ahead.

Any thoughts?

----------------------------
"I loved the bears and cubs feeding in the stream right in front of us!"

"This is where black bear gather to feed on runs of pink, Coho, and Chum salmon, as they head upstream to spawn."

"Bald eagles perch in the surrounding trees waiting for fish scraps left by the bears."

"The bears really put on a show!"

[nspolar]

Mamma B B:

Yes I have some very serious thoughts on the same issue. Some have probably missed a few hints that I may have thrown out in this regard. Maybe I did not throw them out too well.

One hint very recently was Prechter's observation that that gold usually does best when it is moving with the market. I am I guess ST bearish on gold but LT bullish. ST for me might be a year.

Anyway in the end it is all conjecture at this point so I do not plan to post any LT ewave views I might have. This board as are most is focused on ST trading and wave analysis. I am not oriented that way.

I have notice you seem good at observations from a bit back. I would suggest you keep it up and keep the kind of thoughts you have in the back of your head. It might be worth quite a bit down the road. I do not believe we are at present in a C wave down off the '07 top. I think both Prechter and Neely messed up here, and many went along for the ride. They both may know they messed up, but being the prima donna paper pushers they are, they are likely then going to cover it all up with some bull shit counts. Neely with his system can literally throw anything out there on the corrective side.

Look at the MSCI global indices and many other indices, global as well as US. The 2007 top was some sort of top .... but what?

Again a lot of conjecture at this point, but imo an important issue none the less, in the greater scheme of things. Time will show of course.

ns

[Roger D.]

"The end" is near.

http://www.screencast.com/users/parisgnome/folders/Default/media/29dd2711-5c71-4e32-ab85-07e14237231d

[Wave Rust]

If this is a Dude economy, then we better get some economic bowling lessons, especially for those 7-10 splits for traders.

Bring back the TV show "Make That Spare".

Dick Webber for presidential Dude.

Rick Santelli for economic Dude.

wave rust

[cloudslicer]

I just used that picture as my desktop. Regardless of the market call ... that image in priceless!

[Golden]

Important recent tops have often come in the month of March . . .

• August 1999 to March 2000 peak – followed by market/internet collapse into October 2002

• September 2001 to March 2002 peak – followed by 35% decline into October 2002 (interesting that the SPY is trading EXACTLY at that March 2002 peak again)

• March 2003 to March 2004 peak – followed by 9% decline into August 2004 low (again, the SPY is trading EXACTLY at that March 2004 peak again)

• August 2004 to March 2005 peak – followed by 8% decline into April 2005 (low for the year)

• March 2009 to March 2010 peak ?????

Additional trading patterns to watch (from Mary Ann Bartels). . . .

• 4-year cycle low scheduled to bottom between July-October 2010
• Years ending in ‘0’ are the most negative of all decennial years (average 6.9% annual loss) with an intra-year correction of 22%
• Mid-term election years since 1930 average a 20% intra-year decline (peaks around March and bottoms around September)
• The prior four mid-term election years ending in ‘0’ (’30, ’50, ’70, ’90) averaged intra-year corrections of 26%

So far this year, the above trading patterns are aligning beautifully . . . . But remember, history doesn’t repeat itself, but it often rhymes!

A strong close above 1150 on the S&P 500 and the next important upside target would be around 1260 (January/March 2008 lows and near 62% retracement level of the entire decline from October 2007).

For the near term:

• The number of new 52-week highs peaked on October 14, 2009 – the S&P 500 peaked FIVE trading days later on October 21

• The number of new 52-week highs peaked on January 11, 2010 – the S&P 500 peaked FIVE trading days later on January 19

• The number of new 52-week highs peaked on March 5, 2010 – the S&P 500 is now FIVE trading days from that peak

Like the prior two trading tops, I believe the current one (unless it can quickly rally above 1150 and move higher) is in another distribution phase

[Mamma Boom Boom]

ST, I'm showing a double top from Jan, and actually have a minor sell signal.We'll see if the next leg down can look a little more impulsive than previous ones.

Do you think that investors will conclude from the Lehman study, that balance sheets are fish wrap?

[nspolar]

Eyes to gold and the dollar. Neelies wave E blow off top in gold is having trouble.

Gold did poorly today,considering dollar dropped a bit as well.

Dollar is at a decent inflection point, right on the line and has to continue up or flop. If it flops it is going down quite a ways. Looks up to me, and if so gold and the markets may not appreciate it.

ns

[nspolar]

Question, if the dollar rises will be because of a flight to safety?

ns

[twitter.com/DrBubb]

"The End is near."
Eventually, you are going to be right, Roger.
And this may be the time

[David]

i have posted an spx update for those interested... "LONG TERM: bull market" not so sure about it :-)

http://www.tradeyourwayout.com/2010/03/spx-60min-chart-update-bulls-are.html

enjoy the weekend!

[twitter.com/DrBubb]

Good post, Chab.
I am amazed and alarmed to that the British voters buy into Brown's dangerous fantasies.

But the markets may spoil his re-elect party yet. The Pound looks set from another tumble.

The little low-volume rally of the past few days, looks like it is running on fumes.
/more: http://tinyurl.com/BritainBFC

[Ross]

As I'm not a subscriber to EWI I'm curious what there current view of the market is. I was just reading Mish Shedlocks interview with Marc Faber and Faber says no way will we see 666 again in the S&P.. He says Bernanke will stop any correction of 15 to 20 percent in its tracks with money printing.

EWI was very bearish and calling for new lows, I believe.

Many bears are conceding to this move and calling for new highs is seems..

http://globaleconomicanalysis.blogspot.com/2010/03/marc-faber-and-mish-on-tech-ticker-mish.html

[Hank Wernicki]

Market History :

Begins on Monday

Hank Wernicki

[usdollar]

I know I have posted this before, Joseph Russo's wave count. Super cycle 3 done 2007.
SC wave 2 was a flat, which would give this next down leg most probably a sharp. Down to around 750+ area on dow. Mr. Russo had 2 scenarios. One longer, which most likely gives a bottom around 2023, and the quicker scenario, with a bottom next few years. I love this wave count.

http://www.financialsense.com/fsu/editorials/russo/2009/0112.html

[dibles]

hank spill the beans with a chart if you could thanks

[yelnick]

Ross, if Bernanke can stop a 15% correction now, why couldn't he last year? Or 2008? Or 2007? 

[David]

I have posted an update for the asx 200 if anyone is interested :-)

http://www.tradeyourwayout.com/2010/03/asx-200-daily-chart-update-clear.html

[PW]

Thanks Yelnick - Any chance of doing an update to "The Illusion of Stimulus" now that we have been living it for several months since it was first published? thanks.
PW

[Ross]

Yelnick said:

"Ross, if Bernanke can stop a 15% correction now, why couldn't he last year? Or 2008 Or 2007?"

Agree. Wish Mish would have come back with that..

[betterdays]

Yelnick..How about showing the Bradley model again ?

[marketman]

Over the past 7 months, Carl Futia has called this market better than any EW "blogger" around. As opposed to so many of these youngsters that cry market manipulation and conspiracy theory of the day, Carl actually trades for a living, keeps his methodology rather simple, and refrains from trying to "fit" any kind of BIAS into how the market behaves and what it is trying to tell market participants.

It's a good thing that most of these "perma-bear" EW bloggers have a regular 9-5 job. If they actually traded for a living, they would have lost ALL of their capital before Thanksgiving rolled around last year.

These guys call themselves "technicians", yet they spend most of their time conveniently ignoring PRICE behavior in lieu of trying to pick the top of this bull run with a hodge-podge of analysis that is akin to throwing anything, and EVERYTHING at a wall and HOPING something "sticks".

Good luck with that kind of methodology.

[DG]

"Carl Futia"
"youngsters"
"actually trades for a living"
"would have lost ALL their capital"
"perma-bear"
"PRICE" (note the capitalization)

Yep, it's another member of the sockpuppet chorus.

"Posted by: marketman | Saturday, March 13, 2010 at 11:23 AM"

Michael, or whatever your name is, WHY on Earth do you feel the need to use multiple usernames? You don't have to be a linguistics expert to know it's "you" behind all these postings. It's just bizarre.

[yelnick]

Betterdays, the Bradley timing model is no better than astrology. Literally. Here is a link to this year's model, predicting 3/1 as a major turn date. http://www.marketmulticycles.com/marketmulticycles9.htm .. then nada until June 3 or Jun 9.

The model predicts turns NOT direction, and has a fudge factor around the dates of +/- 4 days.

Its touters say it is "eerily accurate." Is it? Bradley major turn in 2009 was Feb 8. Oops. And Bradley had nothing around Mar9. Minor turn at 6/3, but the turn happened 6/11, a bit outside the window, even if you stretch it to 7 days, as they are wont to do. Major turn on 7/14, and the 7/9 bottom happened arguably within if you use the 7 day stretch. Another major turn at 11/9, which arguably makes 11/2 in the stretched window.

In 2008 you could argue 3 of 8 days were "hits", but you have to use the stretched 7 days window. And these are all minor turn days, not the big ones: major turn at 12/22 2007, no; at 6/7 2008, no, and 12/14 2008, no.

In 2007 Bradley had a major turn on 10/17, which is close to the 10/11 high in the Dow although misses the 10/31 high in the Naz. That is a hit within the 7 day stretch, and a good one. Their other major turn on 6/14 was a month or so early to the July tops.

Having hits under 50% does not give much comfort. I wonder if Martin Armstrong's "Pi" model does better. He claims that he predicted the Feb 2007 end to real estate back in 1999. (He uses a 8.6 year cycle which relates to Pi in a complex manner).

I welcome any comments from those of you who have found these astrological indicators useful.

[Michael]

Yelnick is correct about the Bradley. It has not had a statistically significant correlation in identifying "turning points" with regards to the S&P. The only correlation that appears to be significant over the last several years is with Crude Oil.

[Bradley]

My method is lots better than astrology. And so is Carl Futia's. He not just one of these youngsters. He actually trades for a living and would have lost all his capital following these perma-bears' advice.

[Hockthefarm]

Yelnick:

Great summation post for the times we are in. The last part of Prechter's EWT yesterday was a nice follow-up to your piece.

Both of you see an oily rag rolled up in a ball, tucked in by the wood pile. And that is enough for me. Caution is the proper word for most mere mortals like myself.

The attached PE chart for the spx doesn't look that bad until you add in that today is the only period in the entire chart that is in a massive state of deleveraging:

http://www.chartoftheday.com/20100312.htm?T

Maybe it's the ph of the beaker that sets yield and not just the temperature.

Hock

[yelnick]

Hock, a bunch of comments are to the effect 'never fade the Fed'. Well, never say never, as they say. What I think is sound behind that sentiment is this: the Fed is firehosing money on the problem, and it is keeping assets buoyant beyond historical levels. This started in 87, got strengthened in the bank bailouts of the Mexican crisis, and then accelerated in the Asian Flu, Russian bank failures, LTCM and Y2K. And of course in the 2002-5 Greenspan Bubble and now the 2009-xx Bernanke Chopper. Hence historical metrics are off. When the helicopter stops dropping liquidity, these markets will normalize; or when the jig is up and the borrowing costs of sovereign stimulation gets too expensive (either in inflation or interest rates).

[upstart]

"Later this year we'll see the start of the real recession." - Jim Rogers

[Hockthefarm]

Yelnick:

"these markets will normalize"

I agree. Mauldin addresses it here:

http://www.safehaven.com/showarticle.cfm?id=16083&pv=1

Hock

[Hockthefarm]

Aye, there's the rub:

http://pragcap.com/more-on-consumer-debt

Hock

[gio]

great post

[bob m]

nspolar,

Yes! Gold is at an important point. But I promise you, it has faced such times 20 or 30 times in the past few month. It has "convinced" me that is FINALLY made up its mind which way it wants to go only to reverse shortly thereafter.

AND as for the dollar - my favorite description is one I heard from someone on the talking head channel. "The dollar is the tallest midget in the room". NONE of the currencies are in and of themselves GOOD, they are only better or worse than some OTHER debased vehicle. It is like trying to argue which is a better ship the Titanic or the Edmond Fitzgerald. http://en.wikipedia.org/wiki/SS_Edmund_Fitzgerald

[trendlines]

Yelnick and folks,
Next week is very important for short-term direction, and is also the Spring Equinox:

http://trendlines618.blogspot.com/2010/03/s-short-term-upward-momentum-weakens.html

[Hank Wernicki]

Happy Pi Day

Sunday at 1:59 pm

[Alex]

Scene from "π the Movie"

'Math is Everywhere'
http://www.youtube.com/watch?v=WFmWhwyA0NU

On Sept. 15, 2005, Google offered exactly 14159265 shares of Class A stock, which is the same as the first eight decimals of π

[Anon]

I don't see any EW guys (except myself) pointing out the apparent vapor trails that the Nasdaq is leaving i.e. what Prechter called minor gaps that occur as a 3rd of a 3rd is underway.

On a separate note, why would a company need to set its motto as "Don't be evil"? Is that an acknowledgement that evil is the easiest or natural course of action for business or at least Google's business or personnel? I once saw a pseudo-documentary on Google that, rather than ask the former questions, chose to reflect on how conscientious this was of Google's founders. Are they not baking themselves a triple chocolate layer cake and all the while saying "I will not eat this triple layer chocolate cake" over and over again?

Enron's motto was "Ask why". Or was that really "Ask why not". Goldman Sach's would be "Do God's work" - no mention of which God though.

[yelnick]

Anon, good question re Google. My take is Google got going culturally as an anti-Microsoft at the peak of Microsoft as Evil. Eric was a great pick as CEO in part because he fought the Evil Empire in Redmond for years as part of Sun, and did a tour of duty at Novell where Microsoft crushed them. Hence the slogan. The irony of course is Google is the New Microsoft. Read the great piece in the NYT Sunday edition on the battle of Apple vs Google in mobile, or if you like Steve Jobs vs Eric Schmidt. The analogy of iPhone = Mac and Android = Windows is stunning.

[nspolar]

Anon, I have been watching the NAZ and it is one reason I do not buy into this 3rd wave down stuff by anyone, regardless of where we may within it. There is complete lack of syncronization with that approach, amongst the various indices. Besides, if one just stands back and visually views the SPX and the DOW it does not fit, my opinion of course.

I think the DOW/SPX are in sync, lack a 'c' of an abc down. Still in the b.

I think the NAZ is in a 'c' of B, and lacks a 'C' down to complete a huge ABC off the 2000 highs. If I am correct, post a bottom, the NAZ is going to be a ripper.

Several EW buffs I am aware of follow the NAZ, had it in a C or Big C down, off the 2007 high. That count is now totally invalid imo. If I am correct the C down yet to go will be swift, fairly short, and brutal. Maybe to the 400 to 500 area? But it must start first. And if it is C down, it would start with major emphasis.

ns

[Anon]

Thanks Yelnick, I'll take a look.

ns, have to see which trend lines are respected.

[IMG]http://i40.tinypic.com/120tn9l.gif[/IMG]

and up close

[IMG]http://i44.tinypic.com/161i2yx.gif[/IMG]