SPX Update: No Surprise

Last SPX update concluded that "The decline... appears to have been corrective in nature, which implies new all-time-highs are on the menu."

SPX made new ATH's on Friday.  The question now is whether it's going to goof around a bit more before moving higher.  INDU and SPX both remain overbought, and bull markets often work off that condition by grinding sideways for a time.  I suspect we may do that, but the charts don't give me a reason to hold a strong opinion one way or the other on that potential at the moment.

Either way, we still don't have anything screaming at us to be bearish yet -- though that can always change in as little as one session.

I've drawn up one option on the chart below, but I'm not married to it.

Of note, INDU and RUT did not make new highs on Friday.  Usually INDU leads SPX, so unless that situation remedies quickly, then it might be further argument for some chop heading forward.  Trade safe.

RUT and SPX: RUT Backtests the Megaphone

Last update noted that we didn't have enough info yet to declare the rally dead.  The decline that followed appears to have been corrective in nature, which implies new all-time-highs are on the menu.  That said, there is at least a chance that decline was the start of something more bearish -- and in that regard, 2544 is the key level. 

Thus as long as 2544 holds, we'll lean toward favoring the bulls and the prior trend.  If it fails, then we'll give more credence to things bearish.

I would also note here that in the event 2544 marks the beginning of something bearish, we'll likely have a fairly close retest of the ATH before turning back down, so if one is bearishly inclined, there should be a reasonably low risk entry for bears in the next session or two.

One of the charts that has me leaning slightly toward bulls is RUT, which (so far) successfully backtested its recent megaphone breakout.  Now, that backtest can always get tested again and fail, which might be bearish were it to occur -- but right now, all we have to go on is what's actually in the charts.

Still no significant changes to SPX:

In conclusion, we probably still have to presume bulls have the edge here -- but don't get me wrong, I'm not "rabidly bullish" at this juncture, only leaning toward the bulls.  This is still an inflection point, so bears could always pull out a surprise upset.  The good news is that bears who feel obligated to go short should at least see a decent low-risk entry zone that won't cost them terribly if the bulls are indeed still running the show.  Trade safe.

SPX and INDU: Another Big Picture Chart

Last update noted that we needed at least one more new high before we could consider the possibility that the rally had enough waves for completion, and we got that new high.  And a reversal. 

And what that means is that -- while the last few weeks have been easy trading with a clear uptrend and every update ending with some version of "the rally still looks pointed higher for now" -- the easy money may be over for the moment.  At least until this move clarifies a bit.  This is just part of the way things work, because it simply wouldn't be fair if we knew what the market was going to do every single day.

So this is the first bigger-picture ambiguity we've had in a while -- but as always, it will clarify soon enough.

In keeping with the recent theme of the updates, we're also going to step back and look at the larger time frames via INDU.  It's interesting sometimes to go back and read things from a year or more back.  In this case, I remember thinking how bullish this chart was if black bull 1/2 were accurate, and I likewise remember having doubts that things could be that bullish immediately, though I was still firmly bullish on the long-term.  Anyway, interesting to note that the pattern was indeed "that bullish."

In conclusion, INDU is overbought, and SPX does have enough waves up that a more extended correction here wouldn't be unreasonable -- nevertheless, we don't quite have enough info to commit to that idea yet.  Do note that if SPX immediately sustains a breakout north of 2573, there is the potential of a bull nest, so bears might want to exercise extreme caution if that occurs.  Trade safe.

SPX and COMPQ: Very Long Term Projections for Nasdaq

We're going to look at a long-term chart of the Nasdaq Composite which has potentially enormous implications.  Let's look at the chart first, then discuss the implications:

The first thing we notice about this chart is that one could argue that COMPQ has been in a secular bull market since 2002 -- except that's all that's visible on this chart, because one could actually argue on a longer-term chart that COMPQ has been in a secular bull for decades longer than that.  But since there would inevitably be debate over the tech crash and whether that ended the secular bull, we'll set that argument aside and start this bull in 2002. 

That would make the 2008 crash part of a cyclical bear within the confines of a secular bull.  If this bull market is to develop into a five-wave move (as it should), then the next bear market (red 4) will pair with the 2007-09 bear, and will likewise be a cyclical bear within a secular bull.  The bull would then resume to form the final large fifth wave, which would pair with the 2002-2007 red 1/A -- meaning the pending fifth wave could last about 5 years.

But that rally, while significant and likely strong, would truly be a "last hurrah" -- to be followed by a true secular bear market that could last many years - potentially decades.  This may fit the demographics, and may likewise fit the "time to pay the piper" argument that bears have been making for a long time regarding the Federal Reserve's Keynesian boom/bust cycles. 

Those of us who started trading sometime after 1982 haven't seen a true secular bear market.  We've only seen cyclical bears, which end in V-bottoms -- because investors still think stocks are going back up.

Secular bear markets end not with V-bottoms, but with indifference.  Secular bears kill off the first wave of investors who buy the dips.  They kill off the second wave, too, and often beyond.  By the time a secular bear market ends, nobody even wants to own stocks anymore.  Secular bears are generational bear markets.

If all of the above is correct, we can establish a tentative time frame of 2023-25 to mark the potential end of the long-term bull market -- and possibly the beginning of a truly long-term bear market.

Food for thought.

In the meantime, we're not quite there yet, and this wave seems to have at least a bit farther to run before we finally see at least a decent tradeable correction.

Near-term, still nothing that screams "top."  SPX did reach my next unofficial target zone:

In conclusion, it appears increasingly likely that the next top will be a "big one," so there's no need to front-run and we can await clear signals.  For now, the market still looks pointed at least a little bit higher, and that's all we really need to know -- although we should keep in mind that it's now at least technically possible for bull 5 to complete on the next new high.  Trade safe.

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:

Liquidity.

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)

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.