Friday, October 20, 2017

SPX Update: No Material Change -- Plus a Link to a Much More Interesting Article

During the weekend, be sure to check out:  The Acrobats:  Why the Central-Bank-Driven "Prosperity" MUST Eventually End.

I'm a little short on time after publishing the above (which I actually worked on for about a week on and off), so we'll get right to the chart here.

First off, the big-picture chart has kept us pointed in the right direction, and I've ended almost every update with something along the lines of "the market still appears pointed higher."

It appears the market did opt for the expanded flat after all, with yesterday's overnight low marking bear (c):

Had a really hard time uploading charts tonight, so this is a few minutes after the bell.  Nothing really to add to the charts.  Trade safe.

The Acrobats: Why the Central-Bank-Driven "Prosperity" MUST Eventually End

(Editor's Note:  Because this article is rather lengthy, the usual update will be published as a separate standalone.)

Veteran readers know that it's been a really long time since I've written an article focusing on any sort of "bearish fundamentals."

In fact, the last time I wrote about "bearish fundamentals" was sometime back in 2012.  In January of 2013, I wrote an article imploring bears to essentially "forget about bearish things" for a while.  In it, I analogized a trip into the future in a time machine (See: A Survival Guide for Bears in a Bulls' World) as a mental trick to help bears forget about being doomsday bearish.  And I included this observation:

I do know one thing with certainty:  they [the governments of the world] can kick the can a lot farther than most of us imagine is possible.  I know this is true because they already have.

I intended that article to "close the book" on long-term bearishness for a while, partially because (as veteran readers also know) by February of 2013, I had decided we were in the midst of one of two possible scenarios:  Long-term bullish, or really long-term bullish (remember how outlandish this chart seemed five years ago?  SPX to 2170?  Unconscionable!).

Point being, to my way of thinking in 2013, "worst case scenario" was not what traders would want to focus on over the coming years, because that type of thinking is completely counterproductive to making money during a bull market. 

And we're probably a little early to even start talking about such scenarios again now. Time will tell.

But nevertheless, I'm writing such an article now, after a hiatus that has spanned over half a decade (aaaand that just made me feel old), primarily because I have recently become aware that there seems to be an entire generation of new investors who have absolutely no idea what's been going on

They apparently think the 2009-present bull market was driven by... I don't even know what.  Magic fairies or something.

So I don't want everything to come as a complete shock to them when it starts getting real.  The time for education isn't in the midst of a crisis, it's beforehand.  And again, don't get me wrong, I'm not saying that's going to happen tomorrow.  But forewarned is forearmed.

So it's time we opened this discussion again.

First off, let's start with some of the standard yada-yada:  Remember that "the trend is your friend." Don’t buck the trend until the market says you should. When the current bull ends, there will be plenty of warning for people who pay attention to the signals. So don’t get so focused “on the end” that you miss all the money to be made “in the middle.”

I know many a trader who’s gone broke shorting too soon in a bull market.

Sorry, that had to be said… 

Now, since we're partially addressing "a new generation," it's necessary that we quickly recap some basics, in order address some potential misconceptions among certain investors.  Here goes:

Bull markets do not come about because of “good economies” (although they can). Ultimately there is only one thing that drives a bull market:


When there is extra cash floating around (liquidity), then some of that cash finds its way into the market. That means more buyers. More buyers than sellers means a rising market. Sometimes extra liquidity is the sign of a healthy economy (which is what has led to the thinking that "good economies create bull markets").  But in today's world, sometimes the extra liquidity has nothing to do with the fundamentals of the economy.

To better understand this concept, Americans might consider looking around and asking themselves: “Is the real economy significantly better than it was in, say, 1997?”

Most who lived through that time would answer “No, it’s not.”

Yet the S&P 500 is currently trading at roughly double the highest price of 1997 even after being adjusted for inflation.

Obviously, inflation can't be the reason for current pricing, since we're trading at double the inflation-adjusted price.  And certainly the current economy isn’t twice as strong as it was in 1997. So what gives?

Therein lies your answer: What has driven this bull market higher for the last 8 years was not "economic fundamentals," but liquidity — in this case, provided by the world’s Central Banks (CBs). Essentially, the world’s various CB’s have been running the printing presses almost nonstop since 2009. Much of that excess cash has found its way into the stock market, which has driven prices higher. Some might say “artificially” higher, since the fundamentals of the real economy do not support current pricing (especially in terms of production).

So, the CB’s have been responsible for inflating asset prices by flooding an exorbitant amount of liquidity into the world.  One problem with their "free money" approach is that it sends false signals to the market that there is more demand for things than the actual, real market would support.

Let me draw an analogy as to why this is a problem using the following story, titled:

The Acrobats

Imagine you owned a hotel in a small town for the last 10 years. After 10 years, you have a pretty good feel for what the market supports for your business. You have the right number of employees, the correct hours set for them, your income and expenses are well-balanced, etc..

Then one day a large, traveling band of acrobats shows up, and they rent out an entire wing of your hotel. Well, that’s good news, right? You’re pulling in more income than ever!

These acrobats initially book their rooms for a week, so you don’t make any changes whatsoever to your business model. You understand this situation is temporary.

A week goes by, and the acrobats announce that they’ll be staying for another week. Great! Still nothing Earth-shattering — you might have to get a few employees to work longer hours, but again, your business model doesn’t change.

The next week passes, and the acrobats announce to you that they’ve decided to set up shop in your town, so they're going to "move in" for an undetermined amount of time.  They are a superstitious lot, and they don't believe in owning land, so they tell you they'll be staying at your hotel for “at least 10 years.” Holy cow! Amazing news!

But... Your hotel is no longer going to be large enough to support its usual customer base, because these acrobats will be “permanently” occupying one whole wing.

This changes your business model.

You decide you need to expand, because after all, the local artist festival this spring is always a full house -- but with the acrobats occupying so much space, you won’t have room for the artists anymore. Same with the Harvest Festival this fall. And over Christmas, there are always a ton of relatives in town, causing the hotel to fill up…

So you decide to build a new wing, similar in size to the wing that is now “permanently occupied” by the acrobats.  You also figure it's a good time to remodel, and you decide on a "more upscale" look for the hotel.  You can charge higher rates now, because with the acrobats providing a steady source of income, who cares if a small handful of your old customers can no longer afford the stay?  

Plus, wow!  Interest rates are incredibly low right now, so you might as well finance everything at once.  The acrobats will more than cover the payments on a 10-year loan anyway.  When they move out, you'll be paid off!

You also hire more employees and expand the hotel’s restaurant.

Business is better than ever, and things are going great!

After a while, your business has not only adapted to "the new normal," but your business model is now, in fact, predicated on it. After a while, "the new normal" is just normal.  And you forget what life before the acrobats was like.

But then... sudden tragedy strikes. Only three years after the acrobats told you they’d stay for “at least 10 years,” their star performer suffers a nasty fall and is permanently injured.  He and his family leave the hotel.  So do his two performance partners. 

The rest of the troupe then decides this location is "bad luck."  They tell you that despite their long-term promise, they’re not going to stay any longer than they already have.  They pack up and leave town.

Your hotel is suddenly very empty.  And not only very empty, but very large and empty.  You have to lay off half of your workforce immediately, including three-quarters of the Housekeeping staff.

The huge, recently-expanded restaurant starts running specials to attract more customers.  At first, it's "Kids eat free on Tuesday and Thursday!" 

When that fails to bring in enough business, you try: "Kids eat free on any weeknight! 

Then:  "Kids eat free every night!" 

But to no avail.

And the loan payments!  Sheesh, those seemed like a walk in the park when the acrobats were in town.  Now you can barely keep up.  You slowly begin to realize that you may have to sell the entire hotel... But who's going to buy a huge, fancy hotel that is clearly overbuilt for this Podunk area? 

You realize selling is probably not going to work, and for the first time in your ownership, you begin to consider bankruptcy.

As you sit and ponder your fate, you invariably find yourself asking, "How did this happen?  How did I let myself get into this position?"  And the answer comes almost immediately:

The acrobats sent false signals to the market (which in this case, was you). 

How could you know these signals weren't real?  You really couldn't.  Sure, you could have kept the hotel the same size, but you would have been turning away an awful lot of business if you had.  Who can blame you for expanding?  Expansion was what the environment seemed to call for.

(Continued, next page)

Wednesday, October 18, 2017

SPX Update: No Material Change

I've decided to save the lengthy Fed Blast article for Friday, because it's just too long to feel right publishing it on a Wednesday.

So we'll just update the SPX charts today.  First up, the hourly chart shows that SPX has continued consolidating while holding above the noted support level.  Traditionally that's a bullish signal:

No real change to the near-term either, except that the bullish nest of 1's and 2's may be unfolding, but we won't know that for sure unless/until SPX sustains a breakout over the upper trend line.

In conclusion, as I've been noting all month, the big picture still looks pointed at least modestly higher (potentially more than "modestly" though), and there's still nothing for bears to sink their teeth into.  Trade safe.

Monday, October 16, 2017

SPX Update: Fun with Chop

In an upcoming update (probably Wednesday, or Friday at the latest), we're going to look at some interesting facts about the current bull market, possibly accompanied by blistering sarcasm.

But today we're just going to stick to the charts.

Bigger picture, there's no change:

Near term, this complex pattern hasn't gotten any less complex.  We're either in the middle of an expanded flat and will chop around a bit more before moving higher again, or the rally is getting ready to launch in a new nested third wave.  I don't see anything that makes me think of a major top just yet, although there's an off-chance at an ending diagonal terminal pattern (which would still need new highs), but that looks like an underdog at the moment.

In conclusion, they're still keeping the near-term messy, but neither of the leading options looks particularly bearish.   So the bigger picture still looks pointed higher for the time being, though possibly after a smallish near-term correction.  Trade safe.

Friday, October 13, 2017

SPX Update: Market Wants to Keep the Near-Term Complicated, but the Bigger Picture is Still Clear

Well, last update did the best it could with the available information, and I did warn that it was complicated, and that I didn't think the rally was complete yet.  The market's behavior since last update suggests a rare "running flat" pattern, which missed its downside targets and had me believing there was a little more near-term downside coming.

It's still possible for a bit more near-term downside, as shown below, but bears have to continue to realize that the trend is still up until proven otherwise, and act accordingly.

No change on the bigger picture chart, but I do want to remind everyone that there is still no change from the annotation of October 4.

In conclusion, the near-term path from last update was apparently a bust, but the bigger picture outlook for the rally to continue was correct.  Keep in mind that if this rally goes into the extended fifth discussed on October 4, then it will actually accelerate higher, and the target in the mid-2600's will become a reality.  This is one of the reasons I'm continuing to advocate against front-running if you're bearishly-inclined.  The time for that will come again, but this isn't that time. 

If we do head lower shortly after the open, then that will suggest the possibility of an increasingly-complex flat -- but would not yet suggest an end to the rally.  Trade safe.

Wednesday, October 11, 2017

SPX Update: A Detailed Look at the Current Micro-Count

Last update anticipated that bulls were unwinding a fourth wave, and the micro count suggested a completed abc expanded flat.  Well, that micro count was correct, however, the market decided that one abc wasn't enough -- so it tacked on another abc to a slightly lower price.

This means that either that correction can now be compartmentalized as a wxy (which breaks down as "abc-x-abc") and a fully completed wave structure -- OR -- the expanded flat is still unfolding as a more complex wave, and the low at 2441 was wave (b) of that more complex expanded flat.

This has become a very challenging micro count for that reason, but the good news is that the first two leading contenders both have similar outcomes:  They head a bit lower, then rally back up to new all-time-highs. 

There are also two outlier counts:  First is the possibility of a subdividing fifth wave, which would be quite bullish and would become the leader on a direct sustained breakout over 2556;  second is the possibility that the rally is over for now, and there are no more fourth waves to unwind at micro wave degree.  We'll burn the bridge on the second option if we come to it (if the market follows the black path below, then I'll discuss the more bearish option in added detail next update)

I've outlined the two "leading contender counts," which both head lower first, then head back up to new highs, on the chart below.  Keep in mind that these counts are shown conservatively, and could head lower than shown.

On the bigger-picture chart, SPX indeed found support at the black trend line I'd mentioned.  If the "leading contender" counts discussed above are correct, then we might get a whipsaw beneath that trend line in the upcoming sessions:

In conclusion, the decline from 2555 looks impulsive, so it's reasonably likely that we'll head lower over the upcoming sessions.  From the looks of things at the moment, that won't be "the end of the rally," though, it will just be part of a more complex correction.  Since the two leading counts are both at least near-term bearish, I'll simply note what to do if that's wrong:  In the event we were to immediately sustain a breakout over 2556, then we might be dealing with a subdividing fifth wave, and bears might do well to stand aside until that clarifies.  Trade safe.

Monday, October 9, 2017

SPX Update

Last update assumed that Friday's decline would be a corrective fourth wave, and so far we don't have a definite answer from the market on whether that was correct or not.  Let's look at a near-term chart first, to see how this move breaks down:

No change to the bigger picture, except to note that the decline found support a bit higher than the noted trend line.  This suggests that either buying pressure was too strong for SPX to make it "all the way down," or the decline was in fact wave 1/a and we'll tag (or break) the trend line on the next wave down.  Either way, I am still inclined to think the rally has at least a bit farther to run.

Over the weekend, a reader asked why wave 3 on the chart above appeared to be the shortest wave.  It appears that way simply because the chart lacks the level of detail needed to see where wave 1 actually ends, and thus to see that 3 is not the shortest wave. 

Below, I've drawn up a quick, more detailed look at the wave structure.  As we can see, wave 1 appears to have had what Elliott referred to as "an irregular top" -- or what we would refer to as "an expanded flat."  The actual price high appears to be a B-wave, while wave 1 appears to end prior to the price high:

In conclusion, I'm inclined to think that Friday's dip was wave C of an expanded flat, and thus that the rally is still underway.  It is a little tricky, because the decline was impulsive, so there's only a narrow margin for error here.  If the prior high at 2552 wave is not a B-wave, then Friday's decline was only the first leg down of either a two-legged correction or the start of something more significant.  Bears are of course free to ignore my interpretation, and act in whatever manner their conscience dictates.  Trade safe.