Bull Market or Bull-oney

The title of today's post comes from Tony Caldaro, who commented on my pencast Are We In A Bull Market comparing his bull market view with Prechter's bull-oney reply. Ironically, Tony got the phrase from an old Prechter post. In The Yelnick Challenge, Tony rises to the occasion and deepens his argument for a new bull. He gives four requirements for March 2009 being a major bottom, and the Hope Rally the kick-off to a new bull market to, yes, higher highs soon. To counter the bull-oney charge, he comments on the two points I made in the pencast, about lack of alternation between the Jun09 and jan10 corrections, and the lack of impulses in his motive waves (the three upwards move off Mar09, Jul09 and Feb10):

1. Alternation: no argument here. In my pencast I mentioned that the lack of alternation was pointed at other wave counts, not his, since I noted that he considered them to be not part of the same five-wave pattern, but of different degree (specifically, the Jun09 correction is of higher degree than the Jan10 correction, meaning the first is a wave II and the second is a lesser degree wave 2 of III up to much higher levels)
2. Impulsive motive waves: I remain unconvinced. He agrees that it is hard to see them in the S&P, which he characterizes as a "traders index" as compared with the Dow and Nasdaq, which are more widely watched by the general investor community and track psychology better. Putting aside that the S&P is generally considered a better designed index than the Dow and covers a much more representative range of US companies than the Naz, I encourage you to look at the Dow chart he supplies to support his count and draw your own conclusion. To me it has a series of odd wave counts, such as the small 3 in the first wave up to Jun09, and the teeny high-degree wave iii/iv (purple) which is smaller than the inside waves right before it:

 

Another issue remains the lack of increasing volume. While at a major turn, volume usually increases (both before and after the turn) as positions rotate in and out, and then increases at the kickoff of the new direction. We saw that around March 2009, which marked it as an important low - confirmed as events have turned out. Yet the continued lag of volume in the whole Hope Rally since the turn is a major concern. Typically a new bull market brings increasing volume, especially in the leg Tony thinks we are now in, wave 3 of III, which normally shows gaps in the direction of trend as investors finally recognize the new trend is here and pile on. The always-interesting site of Doug Short has a chart from a weekly guestblogger on point:

 

Tony has an explanation for this in his post which I recommend you read, about when different sets of investors recognize the change. He thinks the public is not there yet, and presumably that would explain the lack of the more normal markers of a wave 3 of 3. Yet, objectively, why is it then a wave 3?

Where I think Tony is spot on is his characterization of March 2009 as a major bottom. This doesn't mean we are in a new bull, but may mean it stands as a low point for a while. Here is my view of the three choices we are in - the first two make Mar09 a major low for a while:

1. New Bull: 2000-2009 was an ABC flat correction of 1982-2000, and we have begun a new wave up to higher highs 
2. Sideways Bear: The Hope Rally is a large X wave connecting us to a second flat correction soon. Alternatively, it could be the B of a large 3-wave off 2007 as part of a big triangle. In both cases it need not break Mar09 levels 
3. Big Bad Bear: We are nearing the end of P2 and are about to commence P3 (with P4 and P5 to follow) to break below the March lows. Note that we cannot fall the same distance again or we go below 0. P3 is expected to exceed P1 in percentage down from wherever P2 ends.

What I respect about Tony is his adding of more rigor to wave analysis. He added to orthodox wave theory what Neely did - more precise rules and guidelines - but kept within the frameworks of Elliott Wave theory rather than pushing to a new wave approach. Just a glance at the myriad of wave counts by the plethora of blogger wave sites shows how orthodox wave theory has too high a degree of discretion and subjectivity. As you may have noticed rather than join the wave amateur hour with my own chart fiddling, I prefer to comment on broader issues using wave theory as a perspective. I applaud Tony for pushing towards an objective approach even as I doubt his current count. 

In this regard, he also gives us tests of whether his bull market view is correct. In his Weekend Update, he notes that wave 1 of III (from Jul09) went 281 S&P pts, and wave 3 of III normally would go some Fib relationship of wave 1:

• Short 3 at 61.8%: Sp1219 
• Normal 3 at 100%: Sp1326
• Extended 3 at 161.8%: Sp1500 

A short 3 (61.8%) would end very close to an Sp1214 end point arrived out from a Sideways Bear perspective. (I will post on this Sunday evening, after the Masters.) If we turn around there, it does not confirm his bull count, but it does causes him a methodological problem. Usually one wave of an impulse extends, typically 3 or 5. Indeed, under Neely rules, one segment must extend. And 3 cannot be the shortest. If 3 is shorter than 1, wave 5 has no room to extend, since it has to be shorter than 3. So 1 would be the candidate extended wave, making his wave III as a whole an odd duck which started stronger than it finished. 

A normal 3 at Sp1326 would be close to another Fib relationship at Sp1333, calculated as 161.8% of wave I (the wave from Mar9 to Jun11, 2009). The normal 3 would blast past the 62% retrace level of Sp1229, and past the 2/3 retrace at 1275. It would be close to another relationship, the 70.7% level at 1307. If we get there, the odds of his New Bull increase, and the odds of Prechter's Big Bad Bear decrease. Prechter's P2 count is a wave 2, which rarely retraces more than the range of 62%-67%. 

An extended 3 at Sp1500 would pretty well confirm Tony's view. It would have blown by the 78% retrace at 1378. If a wave 2 seldom goes beyond 2/3, when it goes beyond 78% the odds are de minimus of it being the right wave structure. Under wave rules, waves 2 can retrace as much as 99%; but Tony's extended 3 would be followed by a 4th and 5th waves, which would very likely exceed the 2000 and 2007 highs in the S&P. Hence the Big Bad Bear would be dead. Even if a Sideways Bear remained, it would have been a mistake not to have played the rise! Better to make money in practice than be right in theory. 

A final perspective on this bull or bulloney discussion comes from Glenn Neely, who is in the Sideways Bear camp. He has been increasing his profile, publishing a series of perspectives in SafeHaven and issuing some audio commentaries. His sees us as in the least predictive part of the wave structure, and uses this chart to explain why. More as well in this audio commentary.

GlennNeelyQuote

Comments

[Hockthefarm]

In fairness, I think the impact of current policy (unknown with certainty at this time) will ultimately set social mood and the direction of our markets.

Tim Wood summarizes it best here:

Now, with that all being said, 2010 should be the year that the great inflationary/deflationary debate should be settled, or at least begin to be settled. Reason being there are significant structural and cyclical events that will be coming together later this year in commodities, gold, the dollar, equities and even bonds. The outcome as we move forward into these statistical and cyclical crossroads will without a doubt be key. With commodities the longer-term cycle of importance is the 3-year cycle. In 2008 I called the top of the commodity bubble simply following my statistical data and by watching and understanding the meaning of the “DNA Markers” that I have identified and that have historically marked significant tops for commodities in the past. A bit later in 2010 commodities will be moving into another of these statistically important windows. My hunch is that price will set itself up once again in accordance with the statistical “DNA Markers” that have occurred at all major tops. If so, this should coincide with the tops of the bear market rallies that began at the March 2009 lows, the decline into the Phase II bear market and the return of the deflationary forces of K-wave winter. On the other hand, if price does not setup in accordance with these statistical hurdles and “DNA Markers” then that in turn could be setting the stage for the inflationary scenario to come to fruition. In either case, I will simply watch the statistics and let the market tell me how things set up. As we move further into 2010 these statistics will be extremely important as to which scenario unfolds.
////
Prechter and Dent are very clear on which way they see things going. If they are right, stocks will perform pretty much as they expect.

Hock

[Hockthefarm]

Mauldin states the obvious here regarding what needs to be done.

But what he doesn't state is the consequences of doing the right thing.

Going from lending money with the thought of the tax payer paying it all back to lending money with true economic profit in mind is a step in to nuclear winter. And just try and find someone in gubmint that would knowingly let that happen:

http://www.safehaven.com/article/16378/reform-we-can-believe-in

Hock

[Hockthefarm]

You decide:

Are folks in a position to belly up to the bar and create Obama's grand society??

http://pragcap.com/putting-consumer-credit-in-context

Or is Obama crafty enough to let future generation pay for it all.

Hock

[Roger D.]

Tony C has lost his mind. A easy thing to do in his managed economy world, how easy one forgets why the market fell 8000 pts just 18 months ago.

Roger D.

[Anon]

Caldaro's OEW failed to see a 3rd of a 3rd on the way down. What has changed about his technique that it can be relied on to see it on the way up?

I'm not saying he couldn't, perchance, be right. As anyone paying attention may note from my posts here, I have stated various observations proposing just this scenario. It doesn't add credence to my thoughts to have Caldaro on the same side.

I guarantee one thing however: this is not a new bull market. It may be a continuation and it may result in a new high but I am quite certain that, unfortunately, on some measure (i.e. maybe dollars but certainly gold or oil) this bull market will retrace and probably below 666 (or whatever appropriate metric).

[cloudslicer]

For me the key to knowing when this bear market will end is simple. It is when the debt has been purged. Until then the best the bulls can hope for is that this is a cycle wave 5 up and that 2000-2009 wave an ABC flat for the 4th wave. Great! Except when it completes you will have, at a minimum a SUPER CYCLE BEAR on your hands that is the most bullish count.

[DG]

My logic for why the March lows shouldn't hold, but shouldn't get blown away, either. The "circle wave-b" and "circle wave-c" mentioned are as depicted on Neely's longer-term charts and are Intermediate Degree. "Circle wave-b" ended right before the Lehman Brothers bankruptcy, more than 200 points off the highs. That weakness should flow through to "circle wave-c".

http://yfrog.com/j3spxmonthlyapril1p

Just a glance at the myriad of wave counts by the plethora of blogger wave sites shows how orthodox wave theory has too high a degree of discretion and subjectivity.

Did you see the quote I posted yesterday from the site for the book "Evidence-based TA"?

"EBTA rejects all subjective, interpretive methods of Technical Analysis as worse than wrong, because they are untestable. Thus classical chart patterns, Fibonacci based analysis, Elliott Waves and a host of other ill defined methods are rejected by EBTA. Yet there are numerous practitioners who believe strongly that these methods are not only real but effective. How can this be? Here, EBTA relies on the findings of cognitive psychology to explain how erroneous beliefs arise and thrive despite the lack of valid evidence or even in the face of contrary evidence. Cognitive psychologists have identified various illusions and biases, such as the confirmation bias, illusory correlations, hindsight bias, etc. that explain these erroneous beliefs."

http://evidencebasedta.com/

I'm glad to see you bringing up this topic, Yelnick.

[Anon]

I will simply add this: true bull market's start on apathy i.e. low interest and low volume. Check the volume in and around 1933 for the Dow or 1976 for gold.

Somewhere there is a new bull market starting - but this ain't it.

[Zendo]

"Better to make money in practice than be right in theory. " Yelnick

Thats the most sensible way and practical approach I admired, who cares if one is into market data, camouflage their understandings by statistic, self-indulge with know it all and be all understandings of wave theory, after all the wave framework is just a probabilistic, untested, backward looking observation, its not science and at best it offers another cloudy road map like many technical analysis patterns. But a failure a pattern is usually as important and sometimes more important than a good hit.

I agree, rather to make money than keep digging... great post Yelnick! For me as a farmer I just need to dig so deep to plant my seed, I dare not to read the weather too much, as anything can happen.

[David]

excellent post Yelnick... hard to see a new bull market at this point... still think we are in the larger triangle which could bottom around 2014 / 2015

[David]

actually, i have what Neely charts show... that we are in the (C) leg of this triangle

[Crush]

" ... is a wave 2, which rarely retraces more than the range of 62%-67%..."

Yelnick,

What is your opinion on the NDX? NDX @ 1993 has retraced 80% of P1, with 78.2% being @ 1975 (approx). Of course, if it retraces more than 100% we have alternative counts.

Crush

[trendlines]

Great presentation Yelnick. It will take at least a year before Tony C's view can be validated. Meanwhile, there may be short to medium term opportunities for the taking, that may be missed trying to fit the price and counts. It's very hard to count waves real-time, so i tend not to do it. That's where trendlines help IMHO.

[trendlines]

For folks who're interested, Hang Seng Index may be breaking out short-term:

http://trendlines618.blogspot.com/2010/04/hang-seng-index-short-term-breakout.html

[robert]

I am not casting aspersions on technical analysis but at some point there needs to be a demonstration of economic reality to match the chart predictions and euphoria. Most of the fundamentals (which no one seems to care about) are still far removed from the pre 2007 conditions yet many equity markets have regained egregious valuations posited on little more than wish, hope and an extraordinary dose of government stimulus.

I want to see unvarnished evidence of private sector employment and wages rising for more than 12 consecutive months plus meaningful belt tightening and reductions in debt at all levels before I am convinced that this is anything more than an enormous bear market rally, commensurate with the size (and proportional to the latter stage delusions) of its bull market antecedent.

[Hank Wernicki]

The SPX should gap on the Open for a possible top, the trend is still up base on its 13m/60m surrogate iteration ...

[DG]

Thats the most sensible way and practical approach I admired, who cares if one is into market data, camouflage their understandings by statistic, self-indulge with know it all and be all understandings of wave theory, after all the wave framework is just a probabilistic, untested, backward looking observation, its not science and at best it offers another cloudy road map like many technical analysis patterns.

I think that some people are misunderstanding the point of analyzing trading methods statistically, which is not to overcome the limitations of probability but to understand and quantify them. This understanding leads to optimal position-sizing, which leads to optimal risk-adjusted returns.

While the statistical analysis may not rise to the level of science in the sense of the hard sciences (nothing in the world of finance does, so that's hardly even worth mentioning. If you're going to trade at all, you have to simply accept the fact that NOTHING you do will rise to the same scientific level as physics or chemistry. If you cannot handle this fact, DON'T TRADE), it is a heck of a lot more "scientific" than simply asserting "My method is better than your method! So there!".

A couple of concepts that absolutely should be in every trader's mind when trading are presented here:

http://www.verticalsolutions.com/notes/small_edge.html

[Edwin]

I read Carl Futia' book on contrarian trading. If you agree that the March 2009 bottom is "generational" due to extreme emotion and bearish unity, then we are climbing the wall of worry and there is a lot of gain to come.

[Anon]

As per a couple comments here, people tend to think that fundamentals need to be good for the market to be going up. That is of course patently wrong. Markets bottom in the worst of times and top in the best of times. The question is really: are there worse times ahead because at this present time we know the best of times are most certainly in front of us?

Again on the question is this a "new" bull market. For this you would have to ask: was there historic value created at the low? The answer would seem to be no. P/E was not cheap by historic standards. Dividend yield was not high and currently is only marginally above the 2000 lows. Was artificial value created at the 2009 low?

So how do you make a less than 2% dividend yield look good? You make real interest rates as low as possible. That way P/E can be whatever up to essentially infinity and dividend yield can (as long as it is not negative which is an impossibility) be 0% and lo' and behold stocks look cheap relatively.

How do you do this? You apply out and out QE. You also do de facto QE by having a central bank take risky assets on its balance sheet in return for less risky assets - a straight arb play. Then banks can borrow further against those less risky assets and you create the potentiality for new bubbles.

However, this situation is unsustainable. Just as anyone with a brain knew the escalation rate of housing prices was a consummate bubble - anyone with a brain knows that this situation will not end well. It is apparently a condition of human psychology that people can't maintain focus on the bigger perspective and get caught up in the manic swings that mask the real trend. The trend that can perceived with a little common sense.

[marketman]

"As per a couple comments here, people tend to think that fundamentals need to be good for the market to be going up. That is of course patently wrong. Markets bottom in the worst of times and top in the best of times."

Very true.

And those that believe price behavior in the equity market is highly correlated with the fundamental backdrop of the Economy continue to make a most amateurish mistake. Anyone that has had a decent amount of stock market trading history under their belt, knows full well that liquidity driven markets are known to climb a wall of worry.

Identify and confirm the trend.
Trade what you SEE.
It's pretty simple.

[marketman]

"As per a couple comments here, people tend to think that fundamentals need to be good for the market to be going up. That is of course patently wrong. Markets bottom in the worst of times and top in the best of times."

Very true.

And those that believe price behavior in the equity market is highly correlated with the fundamental backdrop of the Economy continue to make a most amateurish mistake. Anyone that has had a decent amount of stock market trading history under their belt, knows full well that liquidity driven markets are known to climb a wall of worry.

Identify and confirm the trend.
Trade what you SEE.
It's pretty simple.

[DG]

It's pretty simple.

Why do 90% of traders fail?

[Hank Wernicki]

wow ES gapped 10 on the Open tonight !!

[Dave B.]

Wow, what a great shot on #13 by Phil Mickelson! Could be the shot of the Tournament for Phil! Wowww!!!

[Dave B.]

Wow, what a great shot on #13 by Phil Mickelson! Could be the shot of the Tournament for Phil! Wowww!!!

[marketman]

"Why do 90% of traders fail?" - DG

1.) Undercapitalized.
2.) Lack of stop-loss and risk management

[marketman]

3).Inability to trade with the trend; or commit unreasonable amounts of trading capital to counter-trend trading.

4.) Averaging down losers.

[marketman]

3).Inability to trade with the trend; or commit unreasonable amounts of trading capital to counter-trend trading.

4.) Averaging down losers.

[DG]

If trading is "simple" none of those things should matter. Or, at worst, they shouldn't matter so much that 90% of traders fail.

Face it, anything where 90% of the people who try it fail is anything but "simple". I've never understood how anyone could even try to argue otherwise.

[yelnick]

Crush, NDX being above 78% says it will exceed its 2007 high. This could have two implications: (1) it is not in P2 - after all it fell much farther and did not get close to its 2000 high in 2007, so it may be in a different wave structure; or (2) this is not a wave 2 but something else, such as an X wave, which means the S&P could go beyond 1250 +/- 25 above 1300, since an X wave has no Fib targets.

[yelnick]

DG, have you read the EBTA book?

[DG]

Yelnick,

No, because he tests rules which I never thought were significant to start with. I have read the PDFs on his site, though. He does have some interesting findings relating to the VIX as a trading tool in his PDF on "purified" sentiment indicators.

Still, I do think his approach is valuable in debunking the idea that there are "simple" TA rules, e.g., the "golden cross", which are profitable over the long-term. Also, I think his results validate what I've been saying lately about the need for at least two different trading strategies, to reflect the fact that markets exist in trending and non-trending modes. When you try to utilize one set of TA rules to trade both types of markets, you end up underperforming in one of them. Since what he does in the book is take one rule at a time and apply it across all his trading data, it does not surprise me that a trading strategy based on one rule for both market types would fail to generate significance, since what you'd really need (at a high level) is a rule(s) for trending markets, a rule(s) for non-trending markets and a rule(s) to recognize the transition from one market type to another.

And, I think that his quote about Elliott being to "subjective" and "interpretive" really hits home on the problem. In the context of EBTA, Neely's rules are probably closer to a minimum for how rule-driven Elliott would need to be to be testable statistically. Using different statistical tests, I have found that Neely's Weekly trading results as-is are quite close to statistical significance, i.e. he wasn't just lucky in his successful trades, and when you apply the filters I've recommended, the Weekly and, to a lesser extent, the Daily, become highly statistically-significant. That's what you want to see as a user of these methods because it says that it isn't just simply luck and there is some actual predictive value in the forecasts.

[MHD]

Kind of odd that insiders are not buying this rally. In fact they continue to increase their selling as the market heads higher through February. What they say is very strange about the insider activity is the lack of buying.
Strange indeed!!!!!

[Michael]

"Face it, anything where 90% of the people who try it fail is anything but "simple". I've never understood how anyone could even try to argue otherwise." - DG

Darrin, given that you have showed yourself to wholeheartedly embrace a "sophisticated" theory as the way in which a Trader needs to approach the markets because of the quantitative "edge" that you believe Professionals have, I am not surprised that the above "Rules" and why most traders fail is lost on you.

In my 29 years of trading experience, I can totally agree with the fact that the majority of people who attempt to become traders, do so without an appropriate capital base. They are UNDERCAPITALIZED from the get-go, and it usually results in a disasterous outcome given that every single trade becomes emotional, when in fact, it shouldn't be.

And yes, I would also agree that most people who are trying to learn the trading game make it far more complicated than it needs to be.

If you are able to "confirm and identify" the trend with an appropriate capital base, admit when you are wrong, and stay away from being so egotistical as to try and pick bottoms and tops, and do so with reasonable risk management stop-losses, it's not all that difficult to make money.

In fact, I would even go so far as to suggest that if you haven't been able to make a decent amount of money over the past 12 months, you probably fall into the camp that makes trading far "too complicated".

[DG]

Michael,

OK, dude, whatever. I'm bored with this conversation. Apparently, 90% of people can fail at something "simple". Marriage is probably the hardest thing to make work in life and only 50% fail at that, but apparently trading is so simple and it's only people overcomplicating it that make 90% fail.

I love how you accuse most people who try to trade of making things more complicated than necessary because if it's one thing people like to do it's complicate simple things when not complicating them would be lucrative. Hmm, let me think, do I overcomplicate things and make no money or do I keep them simple and make a lot of money? What a tough choice.

None of what your alleging to be the causes of trader failure squares with everything we know about human nature, which is ALL about simplifying under conditions of stress.

Then, you have books like the one cited about which show that none of the common, i.e. "simple", TA rules is a money-maker over the long haul. Yet, again, somehow trading is "simple" even though none of the "simple" rules for trading makes money.

Then, you claim that professionals don't have a "quantitative edge" yet firms like Goldman spend MILLIONS OF DOLLARS on hiring Ph.Ds from MIT, CalTech, etc. and MILLIONS MORE on the finest computer technology money can buy yet somehow they don't have a "quantitative edge".

OK, got it now.

Thanks for setting me straight.

[Crush]

Yelnick, Thanks for responding. If NDX moves higher, one alternative could be 2002 low as wave 1 impulse down followed by an ABC up for wave 2, with the March 2009 low being B of 2, and in C of 2 since (with subdivisions pending). Thanks again.

[yelnick]

Crush, at a more general level about the Naz, I wonder if our economy is about to bifurcate into tech innovators who compete strongly on the world stage, and mainline firms who have cut to the bone and now will have to struggle to increase earnings, given flat revenues. Those mainline firms across automobiles, durables, housing, food, transportation and healthcare all stand to suffer under higher taxes and social mandates much more than high-margin tech firms. It may be the rally will soon peak for them but could continue for tech, meaning the Naz may diverge from the Dow and S&P until broader systemic problems (debt, double-dip recession, etc.) pull everything down.

[Crush]

Yelnick, Your comment captures the essence of the landscape!

The following probably does not add much to your comment, but in any case...

Many tech companies have almost none or very little debt, and are innovative enough so as to invent the next useful device or service, and higher margin products as you correctly point out.

In terms of the overall stock market, I would've thought that they would still be under some selling pressure, especially those that had historically higher P/Es. If DOW & SPX move to historically low levels, then it would be hard for an investor to justify pouring money in non (or low) dividend paying companies peddling growth stories. As you suggest, I agree a divergence in the NDX versus SPX, but if SPX drops significantly it is likely NDX would see some softness.

Many of the mature technology companies (INTC, CSCO, ORCL, etc.) have seen their best days, and are now back to their 2007 levels, so I would think the insiders would be more focused on holding the current levels, and building a larger cash cushion for the future, but then again, these have become large entities and might not be able to deliver the constant growth needed. If we move towards a deflationary environment it would put a drag on their earnings, as I suspect most mature companies have already pledged to focus on employee morale and support, as employees are stuck with higher mortgage payments.

The newer generation companies (or reborn ones) like GOOG, AAPL, RIMM, still seem hot enough to command some speculation interest. NDX being market cap based, is somewhat driven by the latest gizmos, and I am surprised at the level of public consumption of these gizmos; maybe it is due their multimedia aspect and communication capabilities (e.g. cable TV companies do well in a recession because it is the cheapest form of comfort; communication being almost a necessity).

The risk then is commoditization, margin erosion, and growth erosion.

In terms of the waves, if it is a C of 2, then eventually it could sketch a fib multiple of A of 2. Even then, I suspect a C of 2 would have to sketch a retracement (say a 5-3-5).

Thanks for responding!

[Crush]

One more risk factor is that in case of a double-dip recession if the financial industry were to significantly reduce capital expenditure, it would hurt the technology plumbers (databases, communications, servers).