Sunday April 29, 2012
Our big picture view is this.
The stock market is subject to an eighteen year business cycle. These cycles alternate between bull, up, and bear, corrective and sideways. These have played out as follows.
Bull
1911-1929
1948-1966
1982-2000
Bear
1930-1948
1966-1982
2000-2018 Projected
The bear phases are marked by three big downturns, this phase has experienced two of those downturns thus far. A third should be expected.
There are numerous blogs and websites that attempt to analyze Elliott Waves from the big picture to intra day. We believe that the internals, how many stocks are advancing and declining is a better signal. This is particularly true as so much volume is generated from mutual and hedge funds which tend to follow a handful of large cap stocks.This herding characteristic tends to cause final spikes in the overall indexes as more and more money crowds into fewer stocks, the run up in Apple, Chipolte Mexican Cafe, LULU and such are good recent examples.
We have noted that pulling back and using Wilder's Parabolic Stop and Reverse analysis can generate a pretty good Elliott notion of what is happening, here is the big picture from March 2009.
SPX Monthly
Using a monthly chart a pretty clear five wave pattern emerges. This is born out by the highs and lows of the full stochastic indicator at bottom. The problem is that Wave One is the longest here and it should be Wave Three, but we will leave that to the Elliotticians to figure out. What is clear is that the market is nearing previous highs.
SPX Daily
Here is a suggestion for how the move up from the Aug-October lows may be playing out. This suggests Wave 3 has ended and the market is in a Wave 4 correction now. Is it over, I don't think so.
SPX Hourly
The hourly chart suggests that the market has completed an A and B of Wave 4. This means a C follows to finish Wave 4. That would knock out the ones who went long on the move back up in Apple if in fact the market returns to 1345 or lower.
That would suggest a May low followed by a final Wave 5 high above the current 1400 level.
Is that realistic, well here is the picture for the 12 of the current 18 year cycle.
SPX Monthly
The time periods exhibit Fibonacci numbers and three years were up last month in March.
Bullish Percent
Note that despite all the hype on CNBC, this indicator made a lower high Friday. That would be in keeping with the idea that this was a Wave B in a Wave 4 sequence. Note we have lower lows ans lower highs here since the April high. Now go back and look at the hourly chart and note how the MACD is overdone.
Natural Gas
Jason Zweig has a an article on nat gas on page B 1 of this weekend's WSJ. He notes that the traditional ten to one price of oil over nat gas has skewed to fifty to one. A transition to this cheaper fuel is underway. He also notes that investors could get scorched in the meantime. And that is what happened with our suggestion regarding SJT and HGT. Nat gas had a short covering rally this past week. But so far this is not enough to reverse the downtrend.
We really need a close over 2.40 to start turning things around. That is not impossible but it has not happened yet.
And now for our Thanks Ben Bernanke Moment - The trillions of dollars of stimulus pumped into world economies are evident in the price of crude oil and gasoline. This is a repeat of 2008. Then oil finally peaked at $145, wrecking various economies, and the markets collapsed.
The Energy Service Sector should be leading the price of crude oil, but it is the other way around. XES is lagging crude oil even with the stock market up strongly since October 2011. The XES may start playing catch up but this lag suggests that investors in service companies are anticipating problems.
Crude Oil
The trend here is definitely up. We have been adding a mid way 125 day MA, note how WTIC has stayed above the green 125 day line. Will 2008 repeat, will the stimulus money stimulate the evil speculators to do the same thing again? Note that each pullback registers a higher low, a bull market.
The black line is crude oil, and this is four years ago in 2008. The price is about the same about 112 then and 104 now. Actualy now the price is in stronger position than it was then vis a vis the MAs. sMy conclusion is the crude oil is on track to record higher prices.
Dow Transports are lagging Dow Industrials for this same reason, it costs too much to ship.
Central Fund is still at a 2.6% premium to Net Asset Value. If stocks sell off as anticipated, CEF may fall to parity with its NAV. We are accumulating positions in CEF.
Here is more evidence of Bernanke's meddling in the US as well as the underperformance of other economies around the world.
First to last or top to bottom that is
USA, Brazil, India, Shanghai edging out France
The important thing to note here is the increasing divergence. The USA is powering ahead with less and less participation from other markets. How long since you heard anyone discuss the BRIC moniker?
Europe is literally falling apart wtih job prospects in Italy, Spain and Portugal dismal, France looking into the socialist abyss and may decide to speed up its decline if the Socialist candidate wins. Even Rahm Emanuel admits Illinois is in trouble with unfunded pension liabilities. Caterpilar did not locate its newest plant in home state Ilinois.
Bottom Line
We expect a final pullback in stock prices to say Mid May. Then a rally to new highs should follow. The bull market in oil needs to be closely watched the parallel to 2008 is clear. A pullback in gold and silver should be a buying opportunity in CEF.
Thanks for reading The Market Perspective
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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.
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