Transcendental Market Fragments:
The Market:
There was this nasty crash in 1929. The Dow lost 48% of its value in just a few months. But, everyone on Wall Street cheered as the Dow rallied back to gain 48% over the next six months. Then, the market started down the slippery slope once again. This time it lost 85% of its value.
The moral of the story: the market can be deceptively bullish in between declines of 48% and 85%.
The picture from 2007 looks similar thus far.
Nasdaq-100:
I've modified the count. The initial wave down from 2007 to the 2008 low makes more sense as a complete wave (A) with its clear 3-legged waves A and B and an impulsive, 5-legged C wave. That makes the current upward correction also a 3-legged wave (B) rally. Since the 50% retracement level is often a stopping point in such rallies, and that level is close at hand (the high last week was 1605.15 on Thursday, right in the neighborhood of the 50% retracement price of 1628.84), there's a good chance that the market is close to its wave (B) end.
In any case, whether the market continues higher from here, my wave count is extremely bearish over the long term. That's because the next leg down would be a large wave (C) that should easily break below the wave (A) low of last November.
Bob Prechter is counting this rally as a large degree wave 2, with a devastating wave 3 to the downside approaching. In practice, there's really very little difference between large degree C-waves and third-waves. They are both devastating (on the downside for bulls; on the upside, for bears). In fact, the rally I've seen over the last two weeks is a wave C to the upside.
The market is ignoring clearly bearish fundamental evidence that says it is probably years from a real economic recovery. The market may be seeing a stabilization of the economy from free fall a few months ago, but there are no real "green shoots" appearing.
It's all one market. Stocks and commodities are moving together, stampeding in one direction, then reversing and stampeding together in the other direction. This has completely blown away all of the asset allocation models which academics (and financial analysts) had championed for the last few decades. There is no risk-avoidance in diversifying a portfolio when virtually every component moves in correlation with every other component. When the current stampede to the upside exhausts itself, there's no doubt that the herd will stampede to the downside once again.
Shanghai Composite:
The Chinese market will set off that stampede. It's a bubble being levitated by massive stimulus spending from the government. With exports down 20% and a world economy expected to decline this year, a turnaround in China isn't in the cards anytime soon. The excess stimulus is no different from the debt-fed stimulus the real estate markets in America, Great Britain, Australia and other countries reacted to by exploding to the upside and fizzling out. Once the warehouses are filled with commodities like Copper, and prices start going down because no buyers are left, the implosion in China is going to ripple through their economy. Bank loans taken out by speculators in commodities will go sour and banks will start having to raise capital. Sound familiar? Yes, China has created an "echo bubble." In attempting to cushion itself from the effects of the blowup in the Western financial system, they have simply blown up their own version which is doomed to explode and pull the rest of the world economy down with them.
Shanghai bottomed in October 2008, Nasdaq bottomed in November 2008 and the rest of the market bottomed in March 2009. In terms of tops, the Shanghai market topped on October 16 2007 and Nasdaq topped out only a couple of weeks later, on October 31. The lag is likely to be even shorter this time, perhaps just hours, as the herd is more cognizant of the relationship today than they were two years ago.
S&P 500:
The push above 973 continues to suggest that the market could see a retest of the wave iv high of last November at 1007. |
