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Fortrend Securities - Wealth Management
Joel Hewish is an Investment/Financial Adviser at Fortrend Securities and manages the Wealth Management division. The opinions expressed are his own and do not represent those of Joe Forster or the International Advisory division. Edition No. 24 16th February 2011 Bottom Line: Be fearful when people are greedy and greedy when people are fearful (Source: Warren Buffett). With investor sentiment surveys moving to off-the-charts bullish over the past month and equity markets now in, what appears to be, the last subdivisions of their corrective Elliott Wave patterns, while everyone else is complacent, now is the time to reassess your investment asset exposure. Major equity markets now appear to be in the last stages of the global equity market recovery since March 2009 and a significant market top shouldn’t be too far away. Investors should use the price strength from the lows in May/June 2010 as an opportunity to reduce risk and position their portfolios to profit from this opportunity!! Chart 1 – Annual Average Prices of the US Stock Market
(Source: Conquer the Crash, Robert R Prechter Jr, 2002)
Those familiar with Elliott Wave Analysis and the works of Elliott Wave International would no doubt be aware of their call for a new paradigm shift in financial, political and societal forces over the coming years. This change is due in large to the unwinding of global excesses built up through a period of extreme social optimism. It is purported that this wave of social optimism occurred within the context of a super large Elliott Wave pattern known as a Wave 3 of Grand Supercycle Degree. Elliott Wave International argues that this wave of Grand Supercycle Degree optimism peaked with the completion of a 5 wave impulse move into the 2000 dot.com peak. In their opinion this Grand Supercycle Degree Wave 3 first commenced out of the lows of a severe depression in the US in 1784-85, following the revolutionary war which finished in 1783. In this edition of Chartered, I’m going to take a brief look at the technical patterns which have unfolded since the peak in 2000 and try and map where the US stock market is now and where we could potentially be in regards to Elliott Wave International’s pattern expectations. The purpose today is not to argue the fundamental reasons about why we are likely in the midst of a large scale secular bear market, of which the current rally is a large scale bear market rally. Previous editions of Chartered, which are now available on our website at http://www.fortrend.com.au/Publications.htm, can be reviewed to better understand my arguments, but rather, in this edition I’ll analyse and summarise the work already completed by Elliott Wave International, to walk you through their thesis and explain how it relates to financial market patterns and other technical indicator readings being displayed today. Before I do this, it is important to understand that these views are confronting and I am not attempting to advocate or disprove these views in any way. However, I do believe that there are some real merits in the possibility of some of these outcomes arising, so I thought it would be worthwhile briefly demonstrating the expectations Elliott Wave International have and allow you to seek further information if you view these possibilities as being worthy of consideration. Firstly, by looking at Chart 1 above, the bull market which lead to the peak in stock prices just before the bursting of the South Sea Bubble in the 1720’s is probably the best example we have of a stock market in the early years. This bubble, which occurred within the earliest version of the stock market, is suitably labelled Wave 1, as it is the first chartable wave of the stock market as we know it. The bursting of the South Sea Bubble lead to a spectacular secular bear market which lasted for the best part of 60 years. Notice how it is possible to label the decline in 3 waves known as ABC, thus forming a typical zigzag pattern to complete Wave 2 of Grand Supercycle Degree. Should the above labelling be correct, the best interpretation of the above Grand Supercycle Degree pattern would then call for a Wave 3 of Grand Supercycle Degree out of the Wave 2 lows of the 1780s. Therefore the ensuing Wave 3 should subdivide into 5 upward slopping waves, 3 up and 2 countertrend rallies in between, which should also subdivide a further 5 times within each of those waves. As such, upon the completion of Wave 3 of Grand Supercycle Degree, we should expect the commencement of Wave 4 down. That is, if the above Elliott Wave labelling is correct, the market gyrations since 2000 (or possibly 2007) are likely the first subdivisions within a potentially multi-decade Elliott Wave bear market pattern. Should that be the case, this pattern will have very large bull markets and bear markets within the
pattern, but the net result will be that we are unlikely to witness a meaningful and sustainable break above the peaks in the Dow Jones Industrial Average or S&P 500 for potentially a very very long time. Now I should make it very clear, I don’t know what is going to happen in the future, no one does, neither do the analysts at Elliott Wave International. But where Elliott Wave analysis is useful is in the ability of a technician to map where a market might be within the context of its degrees of trend to help increase the chances of making the right investment decisions. So while it has been mentioned that this is a possibility, I’m also not professing that the above waves are a fait accompli by any stretch of the imagination. However, if you are a long term reader of Chartered, you will know that I still view markets to be in a very large degree secular bear market, which has not yet completed. The fundamental reasons as to why the above labelling is possibly correct are many, but in a nut shell, Wave 3’s should be the strongest rallies within any Elliott Wave pattern, they are the most likely to extend and are most often the longest rallies within the Elliott Wave pattern. All these characteristics are present in the above chart. Furthermore, Wave 3’s are usually backed by significant new strength in economic, financial and social optimism. Consider the fact that Wave 3 (as labelled above) was accompanied by the industrial revolution and to a lesser extent, the more recent technological revolution. When considering these facts, labelling the advance from the 1780s to 2000 as a Wave 3 of Grand Supercycle Degree seems like a reasonable proposition. Given that the above labelling suggests that Wave 3 ended in 2000 (or perhaps 2007 as shown below), this would mean that we are now due for or have most likely commenced Wave 4 (a corrective pattern) of Grand Supercycle Degree. Now consider also how the fundamentals of the current macroeconomic environment have significantly deteriorated to the point where you can’t look at a western economy without wondering how the current level of private and public debt and deficits are going to be mended without some pain, and all of a sudden a Wave 4 decline of a very large degree becomes a possibility. It is also useful to consider that large declines similar to that purported above have happened before, from both a time and price perspective, but thankfully they are rare. So before we look at the current markets, I provide below the basic Elliott Wave Principals so that we can apply our analysis to the current market patterns and you can follow along. Basic Elliott Wave Theory: Markets are patterned Those markets subdivide into fractals (self-similar patterns appearing at every degree of trend) and are reflective of changes in social mood. Markets are the best indicator of an impending change in social mood through the analysis of the wave subdivisions. Social mood can be measured in waves, 3 waves up with 2 countertrend waves between. Social mood and changes in social mood dictate economic changes and not the other way around. Extremes in optimism indicate a change in social mood to pessimism is likely and vice versa. 3 Basic Rules Wave 2 never retraces more than 100% of Wave 1. Wave 3 is never the shortest wave. Wave 4 never overlaps the price territory of Wave 1. 3 Basic Guidelines Corrective waves following a 5 wave impulse move tend to terminate within the price territory of the previous 4th wave. Alternation usually occurs between Wave 2 and Wave 4 i.e. if Wave 2 is a sharp and steep correction then Wave 4 is usually a sideways correction.
The wave most likely to extend is Wave 3; the next most likely is Wave 5. Wave Characteristics Wave 3 is almost always the strongest impulse wave, although not necessarily the longest. Wave C is usually the strongest corrective wave. Impulse waves subdivide into 5 Waves. Corrective waves tend to subdivide into 3 waves or a combination of waves that move in the opposite direction of the larger trend. Chart 2 – Typical Elliott Wave Fractal Pattern
As such, if we applied the rules and patterns to recent history, there is a compelling argument which suggests that from a technical perspective, we could be positioned as per above or as per the chart below in Chart 3.
Chart 3 – Typical Elliott Wave Fractal Pattern – An Alternative Count
The above pattern alternative suggests Wave 5 ended in 2007 rather than 2000 and the secular bear market commenced in 2007. As such we are likely at the crest of Wave B which should rollover into Wave C.
Chart 4 – Rough depiction of the likely Elliott Wave Pattern for the S&P 500
To determine whether a decline is technically capable of taking the US stock market below the March 2009 lows and potentially much further, we need to consider the current wave structure since 2000 to make this determination.
So the first thing to look at is the wave structure of the decline from 2000 to 2002? In this instance it is possible to label the decline as 5 waves down. If this wave subdivides into 5 waves down, then this tells us that the trend has changed from up to down. I have tried to slice and dice this decline as best as I could, but I have had some problems comfortably calling this wave a decline in 5 clear waves without some overlapping or stretch of the guidelines. So there is the potential for this decline to actually be a corrective wave. If the decline from 2000 to 2002 is a 5 wave decline, then it would more than likely be considered the first wave down in a new down trend otherwise labelled an A Wave. As such the rise from 2002 to 2007 would be a B Wave and given the decline from 2007 to 2009 appears to have occurred in 5 waves, it would either likely be a C Wave or a Wave 1 down, but it must be treated as an impulse wave. Now the question becomes, why is the preferred count for the decline from 2007 to 2009 NOT considered a Wave C, therefore indicating that the bear market is over and a new bull market is now in play? Well, when making an assessment of where we are likely to be in the Elliott Wave structure, it becomes a question of probabilities and the probabilities significantly suggest otherwise as I highlight in edition 19 of Chartered http://www.fortrend.com.au/res/WealthManagement/edition19chartered10thnovember2010.pdf So, if the decline from 2007 to 2009 happened in 5 waves but it is not a C Wave or the end of a secular bear market, then it must be something else that declines in 5 waves being a Wave 1 of C (as per above) or an A Wave as shown in Chart 5.
Chart 5 – Alternative S&P 500 Wave Count
If the market doesn’t look like it has bottomed, smell like it has bottomed or taste like it has bottomed, the chances are that it hasn’t bottomed. One alternative that could be considered is that in fact the Grand Supercycle Wave 3 upwards didn’t peak in 2000 as purported here and by Elliott Wave International, but rather that it carried into 2007. With sentiment indicators registering extremes in bullishness which have rarely been seen before, this wave count moves more and more into the scene as the preferred count.
Either way, with the decline from 2007 to 2009 occurring in 5 Waves to the downside and the rise from March 2009 weakening significantly internally, meeting extremes in bullishness and having almost completed a 3 wave subdivision countertrend. And when you consider that global debt and deficit problems have only gotten worse and there was a significant absence of supporting valuation markers typically found at the bottom of major secular bear markets, the odds increase significantly that the secular bear market has not finished and financial markets will be challenged again shortly. In other words, the rally out of the 2010 lows shows none of the characteristics which should accompany a Wave 3 advance, but all of the characteristics of a Wave C or Wave 2 countertrend rally. Granted, I probably should have done a better job at identifying the wave structure of the advance from March 2009 to April 2010, which would have identified the possibility of the recent rally from mid 2010 to date, but the evidence that a significant market top is just around the corner seems more compelling than ever.
Chart 6 – S&P 500 – A closer look
The S&P 500 is continuing to etch out the final subdivisions of its currently labelled corrective patterns. The risks in buying stocks at this level are significant, but for the moment the trend is still up. Any weakness through the lower rising trend line would be cause for concern.
Chart 7 - S&P ASX 200
The S&P ASX 200 is very close to the peak reached in April of 2010. A break above 5,000 and the recovery high does not change the internal weakness within this market, but it will require a change in the wave count to realign the counts with overseas markets. The S&P ASX 200 has taken almost a year to get back to where it was in March and April 2010. While the market remains above the lower rising trend line we are safe. A significant break below would be a concern. The S&P ASX 200 is respecting the above price channel. We will have to wait and see how it all unfolds. Like the S&P 500, the S&P ASX 200 still very much appears to be in a large secular bear market within which we are seeing a countertrend rally.
Chart 8 – USD/EURO Cross Rate
The USD has found support over the past week against the Euro, which it needed too if the above wave count was to remain in place.
We should now expect to see the USD begin to pick up momentum against the EURO to the upside if it is to fulfil the current expectations of the above pattern. So far so good, the pattern and levels of support are meeting expectations and the bounce out of the low in early February came right on time. Bear in mind, an advancing USD does not typically bode well for an advancing stock market.
Chart 9 – AUD/USD Cross Rate
The Australian dollar is finding the going tough above USD$1.00. A close below USD$0.9801 would be the first indication that the AUD has likely peaked, but a break below USD$0.9535 would almost seal the deal for the start of Wave C down. The AUD is moving sideways, so the potential for a break to the upside still exists. A break out above USD$1.0253 will mean the AUD is going higher, possibly to USD$1.05. A break below USD$0.9535 will almost certainly prove to be the start of a significant decline in the AUD. What an interesting time we live in at the moment. Stock markets keep rising and levitating into the stratosphere. Apparently the message is clear, with Bernanke at the wheel and his put option supporting stocks, maybe we should just give up and follow the heard this time? Yet another report (http://pragcap.com/confidence-in-equities-at-record-highs) has been released recently showing the extremes this market has travelled to with regards to bullish sentiment, but why even bother looking at these anymore with Bernanke in control? And then I stumbled on this article from renowned trader Jeff Clarke which I found amusing.
The Final Piece of the Puzzle By Jeff Clark
Tuesday, February 8, 2011
Everything is in place now. For the past couple months, I've been harping about the potential for a bearish move in the market. Sentiment indicators, summation indexes, bullish percent indexes… all the technical indicators are warning of a swift and severe correction. The market doesn't care. It just keeps marching higher. The high-frequency trading desks, the algorithmic computer programs, and the Bernanke printing press have overpowered the technical indicators and – like Atlas propping the world up on his shoulders – kept a persistent bullish bid beneath the market. The new high list keeps growing. Expensive stocks keep getting more expensive.
Every day I warn investors of the potential risks in the market. And every day I start the morning by washing the egg off my face. Why worry about risks when there are such large gains to be made? "It's a new world," the market says. "Either get on board or get out of my way." So yesterday I sat at my desk, banging my forehead on my keyboard and wondering what else has to happen before the market corrects. What other indicator has to reach a ridiculously extreme level and warn of the impending doom before stocks finally take a breather? This was 9:41 in the morning, Pacific Standard Time (PST). At 9:42, the phone rang and the final piece of the puzzle fell into place. "Hi Jeff," the voice said, "It's your mom. Just wanted to get your opinion on the stock market. We're sitting in cash right now, earning 0%. And we're thinking about buying some stocks." Get out of the market while you can, folks. The "Mother Indicator" has just issued a sell signal. Mom is the perfect example of a public investor. She doesn't pay much attention to the financial markets. So if she's aware of a trend, or has an inkling to put money somewhere, you can bet the idea has gone mainstream. And she has a near-perfect track record as a contrary indicator. Signals from the Mother Indicator don't occur often – perhaps just once every two or three years. They are, however, remarkably accurate… And they always seem to occur within days of important turning points. For example, I first acted on this signal in early February 1994. Stocks had been on a terrific run – up 20% in about eight months. The Fed was easing, so interest rates on CDs and money market funds had been falling. Mom was looking to get a bit more bang for her buck. And for the first time since August 1987, she wanted to buy stocks. I got the call on the first Saturday in February, and sold everything the next Monday morning. That was the exact high for the stock market in 1994. The S&P 500 lost 17% over the next two months. Mom has been useful in calling tops and bottoms in the gold and oil markets, as well. In fact, some of the best trades I've recommended to subscribers of my various newsletters over the years have been based on using Mom as a contrary indicator. I've written about the Mother Indicator before. I've given speeches on the topic. It's one of the most reliable market timing indicators in my arsenal. At 9:42 PST yesterday morning, the Mother Indicator flashed a sell signal. The S&P 500 was just above 1,322 at the time. I'll bet it's significantly lower two months from now. Best regards and good trading, Jeff Clark
http://www.growthstockwire.com/2636/The-Final-Piece-of-the-Puzzle As such I strongly encourage you to review this material and consider the timing of these events within the context of the above bullish sentiment extremes and bearish technical patterns. If you are interested to know how you can protect your wealth and also profit from this opportunity, I strongly encourage you to contact me today!!
Interested to know more about Elliott Wave Analysis and the science of Socionomics?
For those people new to Elliott Wave Analysis and wanting to understand the principals behind it and the development of the new study of Socionomics, the Institute of Socionomics, in conjunction with Elliott Wave International, have just released this new introductory video http://www.socionomics.net/hhe/video/stream/flash/default.aspx?page=1 to help newcomers to this new way of thinking and analysis. It is recommended viewing for anyone even slightly intrigued, whether you are a believer or a sceptic. It provides for some very interesting viewing. I hope you have enjoyed this edition of Chartered and found the content of interest. If you would like me to analyse a particular market or chart from a technical point of view, please email your requests to firstname.lastname@example.org and I will endeavour to look at any requests in upcoming editions.
In the meantime, if you would like to arrange a time to discuss your portfolio and some of the strategies which can be used to help you navigate the prevailing market conditions and profit from this opportunity, please do not hesitate to contact me on 03 9650 8400 or 0401 826 096. Kind regards, JOEL HEWISH B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan, SA Fin Investment / Financial Adviser FORTREND SECURITIES - WEALTH MANAGEMENT
Australian Financial Services Licence No. 247261
Chartered is a fortnightly publication from Fortrend Securities – Wealth Management and is provided for the purpose of general information only. The views and opinions expressed in the publication are those of Joel Hewish and do not necessarily match those views of Joe Forster and Fortrend Securities – International Advisory. This publication is provided as general information only and does not take into account your personal circumstances, aims and objectives and should not be considered personal advice. You should first consult a licensed Investment or Financial Adviser before acting on any of the information provided in this publication.
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