The Election Rally May Be On

There are ... lies, damned lies, and statistics - Mark Twain, quoting Disraeli

September may be the cruelest month, but this time the joke is on the bears. This is the best Sept since 1939. I have been providing the plethora of historical analogies for consideration, and here is yet another: the WSJ looks at Septembers in mid-term election years, and creates a composite from seven such years in which future market conditions were uncertain.

There is a lot of speculation that after the election the market will rise, but the WSJ notes how money managers look forward, and once it became relatively clear what the mid-terms would bring (gridlock!) they looked beyond that issue to expected macro conditions. 

The WSJ provides a companion chart of the actual data beyond the blended chart, and that too is interesting in that the average hides a dramatic skew in the six month period before and after:

• in 1934 we were flat before (-1%) and rose 7% after
• in 1938 we rose 38% before the election and fell -20% after
• in 2002 we had fallen -14% before and kept falling slightly (-2%) after
• in 2006 we rose 4% into the election and continued up 6% after

1938 still is looking like a close comp in both economic worries (of a double dip) and the rise before the mid-terms. If this pre-election rally holds, it suggest the seasonal strong period, which normally begins in Nov, has already started. If patterns hold, it suggests a continued bull run into at least Jan 2011 if not the normal 'sell in May' high in Q2. If the 1938 analogy obtains, we should see the next deep drop begin on Q2 2011. 

Comments

[Michael]

I see that Exact Sciences (EXAS) is now trading over $7.00 per share. Wow!

[Wave Rust]

CommieNewsBullchitCult (CNBC) is reporting Prechter is saying sell this rally because the Dow is going to 1,000. (Isn't that treason, under the Patriot Act, to call for Dow 1,000?)

coming on Maweeuh Bawtiwomo now.

watch him say the flash crash today in a some stock (forgot the name) is a precursor the end of western civilization.

wave rust

I'm selling everything on Bob's sell signal. Only thing I'm not selling is my shoes, so I can still run-for-the-hills.

if a bear is chasing you and other bulls, you only have to out run just one other bull. :)

[Wave Rust]

yelnick,

i'd be interested to see the general trend of the size of your affiliate checks before during and after the calls that Prechter makes.

only if you want ,,,, just curious.

tomorrow could be the end of this corrective ,,,, or it be the start of a good correction.

still in cash. yawner day

wave rust

[Roger D.]

Looks like the topping process has begun,looks like some have started early. Unless the market gets fueled here by more Fed pumping a top is in by 9/29 if not already.

Roger D.

[cjmorris1201]

Just admit it...no one really knows what the market is going to do.

[da bear]

Roger D.,

I think you may be right.
Also, SLV has put in five waves from its Feb. 2009 intermediate lows. GLD would have to rally a little bit more for the five waves to be in (like another $2).
From its fall 2008 lows a wave 5 high should be around $22.
From a kitco 10 year chart, gold may have put in a full five waves if the Spring 2008 high was the wave 3 high. Gold has actually had a slight throw-over 3 times...

Stocks and metals may all be topping out here.

Anyone have a good long-term dollar chart?

The dollar had a really bad end to last week. A contrarian buy?

da bear

[yelnick]

wave, the affiliate payments don't amount to much, but they do spike when Prechter gets into dramatic calls. The pattern is: Flat market = flat payments. Rising or falling = higher payments. Drama = highest. Right or wrong. 

For the record, let me add something that gets lost in the bashing in this and many other sites.
Prechter gets credit for the top call in 2007, the bottom call in Feb 2009, and the recent top call in April 2010. He blew it with his two double short calls in 2009. Hochberg also gets bashed, but he has been pretty good in that he didn't make those double-short calls and yet supported the major turn calls. This flat market is trying his patience, but his count (revised to the double flat) is not busted yet. He is more cautious in his STUs than I think people think, yet is constant in his analysis until a change in facts force him to change. Neely is pretty good at helping day traders clip pennies for profit, but has been off on his big picture stuff since Nov 2008, missing the March bottom and prematurely calling the end of the Hope Rally in June 2009. 

[Roger D.]

The ES

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/3320c86b-131f-476e-9eb0-bd60885220ee

[Hockthefarm]

"This is the best Sept since 1939."

"I'm shocked, shocked to here that gambling is going on in this place", as my favorite French policeman would say.

Bottom line is that the pundits have no idea how their economic analysis will play out in the markets in 1 to 2 year time frames. And that is not the end of the world, but let's call a spade a spade.

Hock

[Wave Rust]

Yelnick,
thanks for the payments info. quite interesting about the drama ,,,, I assume drama = fear of any sort.

I may have subscribed 30 years ago but I don't remember if I did. Do BP and Hochberg use or mention/rely on any technical analysis tools regularly, other than wave counts and the occasional mention of sentiment?

I ask because of all the traders and trading newsletters I am familiar with, they all use technicals, some fundamentals.
Most base a trading look on several tools.

The point is BP/Hochberg/Neely could use a healthy dose of something else. maybe their timeliness and accuracy would zoom along with their credibility.

to my trading, EW is, at its highest, only 20% of an overall trading outlook. At its least it is irrelevant.

Thanks again for that aff. payment info. It reaffirms my faith in the fact that people trade with a ton of uncertainty and the fear of not knowing what might blindside them.

emotions drive people to often do the wrong thing at exactly the wrong time ,,,, impulse buying at the checkout line is nearly the same thing.

wave rust

[Bill C]

I think the one thing that would shock the most people would be a double top and then wave C of this pattern which started at the April high. (11,258) Even taking out 11,258 by a small amount before the sell off. What would shock me is if March 2009 was the end of the bear and we started motoring towards 14,000+. I just can't see 2011 being a good year for stocks or the economy. Sideways maybe but up- not a chance.

[Bill C]

As a side note, anyone notice that the Chicago Bears are leading the NFC? Bears, get it? Nevermind.

[Wave Rust]

Bill,

",,, What would shock me is if March 2009 was the end of the bear and we started motoring towards 14,000+. I just can't see 2011 being a good year for stocks or the economy. Sideways maybe but up- not a chance."

Fade yourself. :)
and you will be blamed if da Bears don't win another game. LOL

If i know anything, then by April next year, the Dow will only be half way up its relentless wave 3 of wave 1. Why? because wave 2 of wave 1 just finished. but what do i know?

yeah wave 3 of wave P1 of wave III ,,,, or something like that.

if anyone wants to be bearish, then only look at intraday and daily dow/spx, but that is a false and flawed perspective.

imho, people ought to be focused on the weekly charts and trends. such as, we now have a real zero to 2 trendline ,,,, march '09 to july '10.

but an even more bullish trendline will come later at much higher prices ,,,, as they always do.

undeniable truth, the weekly momentum at the july low retested the march '09 low, and did it successfully. the march '09 low is now the premier low for the next 15-20 years, replacing the '98 low which replaced the '87 low which replaced the '74 low, etc. ,,,, except this move is going to be so much bigger than 9 times up from the '87 lows. it might even get obama re-elected (heaven forbid).

a last point, sideways is just as bullish as an up trend, because it aint going down and it's just getting ready for its next up move.

wave rust

[Manav]

Having read this blog for sometime now and having followed EWP as well, in my opinion the method suffers from 2 big handicaps which undermine its credibility no end :

1) What is a 3 and what is a 5 ? We have seen countless instances when what was originally counted as a 5 is made to fit as a 3 because the marked action subsequently did not allow the 5 count...and vice-versa as well

2) Degree of a wave is too subjective --- so when we get a correction which we think has ended all of that pattern, we call for a return to the direction of the larger impulse as EWI has been doing but when market action does not support the call, we promptly say that yes, it was indeed a correction, but of a smaller degree within the larger degree

[DG]

Manav,

I would say that if you read "Mastering Elliott Wave" by Neely, you will see that he has come up with techniques to help avoid those two problems.

It's almost a running joke how many times I have told others that their "5s" were actually "3s" because they did not conform to Neely's rules for "5s". Using just those rules, I have avoided every hyped-up "5 waves down!!!!" call from the bears and vice-versa from the bulls.

I have found, especially regarding the second, that he has inconsistently applied his insights on this issue in a trading context and thus has missed out on a large bull run. That's his fault, because the theory he's developed regarding this is sound.

In any case, while I think MEW is the best book for describing how to actually count waves, BY FAR the most important aspect of the book is its analysis of the logic of self-confirmation and the logic of each Elliott Wave structure and what that logic implies in terms of narrowing down the ways in which structures can fit together to create larger structures. Wave theory is based on "mass psychology", which is itself an inexact science. The fact that Neely was able to bring at least some rigor to this is a huge advance over the crude methods of citing sentiment figures or using technical indicators to support wave counts.

Finally, just a word about what levels of trading accuracy wave theory can achieve. Having looked at Neely's track record for a fairly long period (over 4 years of data now), I can say pretty confidently that he achieves between 45% and 60% accuracy, with accuracy going higher as the timeframe increases. My position over the past year has been that your best shot at making money using a wave theory service (available to the public) is to follow Neely's recommendations on the Weekly timeframe. It has quite a large positive expectancy, which is among the most, if not the most, important thing for any trading method to achieve. Without positive expectancy, you are losing money, on average, with every trade over time.

However, for someone who wants to trade more frequently, the Weekly timeframe will probably be disappointing due to the small number of trades it generates, because you have to wait for the structures to set up on Weekly charts (sorry if I'm just telling you things you already know). But, if traded using a analytically-correct money management scheme like Kelly or even fractional-Kelly, rather than Neely's fixed-fraction approach, even the Weekly timeframe would have provided returns in the hundreds of percent over the past 4 years using ES futures. So, if you are thinking about long-term trading success, you could do worse than that. And, as I mentioned, you don't have to get every single trade right to have that level of success.

One word of caution, though, is that if you do choose to read MEW, don't read Chapter 3 (or read it until you just don't want to any more), at least not on the first attempt. The logic of the rules codified in Chapter 3 is explained throughout the rest of the book at a much less technical level and is sufficient for almost anyone's needs.

[vipul garg]

manav,
the degree of waves is the single most important element of EWT if it was really possible to say just one.
and it is alarmingly also the single most neglected element by EWT practioners.

and prechter and company is the most vocal EWT practioner without any regard for degree.
dow 1000 is possible in case of electronic and system malfunction with the screen LED showing one less zero or something !