Friday, December 1, 2023

SPX Update: Let's Take a Serious and Critical Look at the Bull Count

In all my years trading, I have never seen bears so demoralized and discouraged as they are right now.  NEVER.  As most experienced traders know, usually bulls are most demoralized near major bottoms, and bears are most demoralized near major tops.  In both cases, sometimes there's a final "washout" wave that crushes the last of the strong hands (bull or bear).  Make of that what you will.

Let's step back and take a serious look at the count bulls are banking on.  I mean, let's really try to envision this... and afterwards, we'll project what sort of things might need to happen at the fundamental level for this to work:

For the above count to work fundamentally, here are some things that probably need to happen:
  1. Inflation needs to stop, obviously.
  2. Rates need to come back down to somewhere near the lowest levels in history [which is where they were during the prior bull market], in order to again fuel some degree of debt expansion.
  3. Commercial real estate needs to come back from the edge, and rates coming down would only be part of that equation:  People also need to return to working in an office and quit this remote stuff.  People also need to stop shopping online so that brick and mortal stores can make a significant comeback.
  4. Treasury buyers must be found, in order to fund the rapidly-growing national debt and to help bring Treasury rates down, because it's hard to bring rates down when there are barely enough buyers to absorb supply.
  5. China needs to find a way out of its pending demographic crisis, in order to keep buying Treasuries and in order to keep manufacturing cheap Widgets for us.  And also to prevent their highly speculative real estate market (which already features numerous literal "ghost cities") from melting down and causing any degree of global contagion.
  6. American consumers need to get out of debt and start spending and taking on new debt again.  The problem with a lot of this stuff is "it only works once."  You can't max out your credit cards AGAIN until you pay them off.
  7. GDP needs to increase substantially and in a real manner, since all recent "rises" in GDP have been fueled solely by the government borrowing and spending (see: Treasury oversupply, etc.).  Again, seems hard to do when everyone else is already tapped out, but no matter, it needs to happen to fuel that bull market.
  8. Banks need to strengthen their balance sheets.  Of course, if commercial real estate recovers somehow and Treasuries come down substantially and mortgage rates come back down (so that banks aren't stuck holding all those 3% mortgages, which are a liability in the current environment), then banks will probably be just fine.  The problem is:  How do we get those other three things to happen?
This isn't even an exhaustive list of the fundamental challenges bulls are facing. 

So, for sake of argument, let's assume bulls can manage to make a new all-time high in SPX in the coming months (and that outcome is not a given -- in fact, it's not even a given that SPX will break the July highs).  But in that event, given what we know about the fundamental environment, this is what would look more reasonable to me:

In conclusion, is it possible I was "a wave early" in my long-term count?  Absolutely, it's an easy error to make and most of us do it at the micro level fairly regularly.  Is it likely I was WAY off and the black mega-bull count will show up?  You be the judge.  

Near-term, keep in mind that SPX is still sitting at/below resistance, via the July highs.  Trade safe.

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