binve (< 20)

binve's CAPS Blog

Market Thoughts and Analysis: Summer Doldrums or Hurricane Season?

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July 09, 2009 – Comments (41)

Green Shoots, Head and Shoulders, P-PIP and BS. Actually lots of BS. This post is just a "random walk" through some current fundamental and technical issues. And FWIW, I believe the market volatility coming up will resemble hurricane season much more than summer doldrums.

I am going to try to start posting a few thoughts on a semi-regular basis. I have written a lot of "special topic" mammoth blog posts in the past when I had time on the weekends. This post will not be a tome, nor will any in this series of regular updates. Just a few thoughts on the Fundamentals and some charts that I watch on a regular basis. It will tend to be broad market / equity focused. I will save gold, commodities, and in-depth Dollar analysis for special more focused posts.

Here is a list of most of my in-depth market analysis posts:

- This Rally was Pure Weapons Grade Balognium Jun 22, 09 - LINK
- Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog Jun 17, 09 - LINK
- Market Thoughts and Analysis: The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) Jun 15, 09 - LINK
- More Thoughts and Analysis: Timeframes - Bearish, to Bullish ... to Bearish May 17, 09 - LINK
- Still Bearish: FA and TA on S&P500, Observations on the Economy May 10, 09 - LINK
- Technical Investing Themes: MacroTrends, USDX, Oil, Gold, S&P500, etc. Mar 27, 09 - LINK
- Is Natural Gas Potentially Bottoming? Mar 23, 09 - LINK
- Update on Oil, Gold and the USDX Mar 19, 09 - LINK
- Short Term Oil Jan 7, 09 - LINK

Here is a list of very good commentary posts that discuss inflation / deflation / monetary policy / macroeconomics, etc.

- Steve Saville: Market Value, Money and Credit - Good layman's description of TMS and its importance

- Quantitative Easing Explained - Just a good funny article on QE
- Steve Saville: Why We are Gold Bulls - A good inflationary summary
- Steve Saville: Money Confusion and Inflation/Deflation - Good discussion as to what consitutes money and why some monetary discussions are invalid
- Zeal: Big Inflation Coming 2 - Good discussion of inflation and deflation.
- Mises: TMS - Good Definition of True Money Supply (TMS).
- Saville: Inflations New Upward Trend - Misuse of the Velocity of Money concept
- John Mauldin: The Endgame - Very good deflation arguments.

Purpose and Background

First I am not trying to convince anybody of anything. You may hate TA and think it bogus. Fine. You may think Elliot Wave is garbage. Perfect. You may think my fundamental stance is idiotic. Good for you. I am quite literally fine with all of those responses. I am sharing my thoughts. That's it. Maybe it is useful to you, maybe it is not. I have nothing to sell. I am not trying to wow you with prognostications, nor am I trying to indisputably prove that TA works. I am sharing my thoughts. Nothing more, nothing less.

I have written several posts and many have come to appreciate my thoughts and / or my writing style. And many of you disagree with me. And that is perfectly fine too. In fact, the discussions from these disagreements are some of the best discussions I read on CAPS. So even if you don't agree with me, please rec my posts if you appreciate my thoughts, candor, or analysis and the time I take to write them.

Regarding my analyis and Elliot Wave counts specifically: Read this RANT. I will not regurgitate that rant here. I have done it many times already. Please read my rant first before questioning the validity of my analysis, or presuming that I am stating my analysis as more than a guess.

Many of us EW Technicians have what we call a “preferred count”. This means the count and analysis that is the most likely to happen, in our opinion. We may have several different counts that are viable based on the unfolding price action (because ultimately any pattern is incomplete until it is in the past). But we select one that is most likely, the “preferred” one. And per the observation made above, any good analyst knows that even the best guess is still a guess. So even the analyst who makes the count does not put an absolute 100% likelihood of occurrence on it..

Okay, that out of the way, lets get to the good stuff!

Yes indeed, this is binv's Tin Foil Hat Area! Acutually many people don't agree with my fundamental analysis, especially regarding inflation / deflation. And even less agree with my TA, especially my Elliot Wave Counts. So if you find yourself actually agreeing with what I write, then might I suggest wearing a Tin Foil Hat? I will gladly sell you one for just $19.95! (plus shipping and handling of course) .... :) (just kidding). On to the analysis!

Fundamentals

Broad Market and Earnings Well here were are in the midst of earnings season and the misuse / overuse of the term "priced-in" will be spouted by talking heads as if they have Teret's syndrome. Companies will seemingly be reward for crappy performance, or rather performance that is not a crappy as was expected .... or will they? Alcoa (AA) is the first example here. It had horrendous earnings, but was "not as bad as expected. And it was up over 7% in before hours trading, was up 6.8% during hours. .... However it closed around 2.5% down.

So is the cycle of bad news being ignored over? In short, I think yes. June 11 marked the peak, technically and I think it did so in terms of sentiment too. My June 22 post discusses this in more detail: This Rally was Pure Weapons Grade Balognium Jun 22, 09 - LINK.

Real, honest-to-God, GAAP earnings estimates for the S&P 500 for 2009 are still around $40 from honest reputable analysts (think John Mauldin). I have seen non-GAAP estimates that are much higher (which are BS) or other "fiddled" estimates. So at ~888, we are still in the PE rang of 22. For an overdone rally, this is pretty high if you ask me.

Financials (pigs with wings) Many are still flying, but a lot of hunters have now realized there is bacon just flying around in the sky. This was never bound to last long. Whatever P-PIP plan gets put forward, which is ultimately another band-aid, always remember these points when it comes to finanicals (from Still Bearish: FA and TA on S&P500, Observations on the Economy May 10, 09 - LINK)

- 1. Consumption accounts for 70% of GDP
- 2. Consumers are hurting
- 3. Unempolyment is rising
- 4. Home Prices are Dropping
- 5. There is another wave coming to the mortgage crisis: Option-ARMs (read increased defaults and foreclosures)
- Points 1-4 will hurt counsumers which hurts financials due to increased defaults, and point 5 is a direct double whammy to financials
- 6. Most earnings are fake
- 7. Stress test results are fake
- 8. Mark to Market is fake

Maybe this weeds out the weak ones and the "strong survive" .... okay, good luck with all that. I personally do want want to place bets on completely opaque instutions with horrible fundamentals thinking it is a strong one and only to be blind-sided later on.

Why do I continually harp on financials? Because they led this rally up and I believe they will lead this rally down.

.... continued in the Comments section ....

41 Comments – Post Your Own

#1) On July 09, 2009 at 8:37 PM, binve (< 20) wrote:

Technicals

As a little background (first if you have not read any of my posts before, please read the links above at the beginning to get a feel of where I am coming from), I am very bearish short term. I think the technical picture is very bearish for the market. We made a high on many of the indices on June 11. We also had a Dow Theroy non-confirmation (Transports did not make a higher high with the Industrials), which is not necessarily bearish in and of itself, but it sure ain't bullish!

As a proxy, my go-to index is the S&P 500, and I present much of my analysis in that one. But you will see in my charts below, that I always look at the S&P 500, Dow Industrials, NASDAQ Composite, and Russell 2000 for all my counts and analysis, even if I show the SPX predominately.

Medium and Short Term Count for the SPX:

First I zoom out to the intermediate count so you can see the bigger picture before I drill down. I am very bearish right now, especially based on the technicals. Right now we are flirting with a support level at 875, and have not yet broke convincingly through it. There is an alternate count that is feasible and almost appealing analytically. But based on the *way* the the price has unfolded since June 11, I am sticking with my preferred count.

Just an observation: The corretive option is a possible one, but since June 11, all of the impulses down have been steepending (longer prices in shorter periods of time). It looks to me like it is accelerating toward Wave 3, if in fact it is Wave 3. This is another reason why the Wave 3 / impulsive count is my preferred. (my $0.02). Stop looking at the counts, indicators, channels lines, patterns, etc for a minute, and look at the *way* the price has developed since June. It it plunging farther on each down move. Also the speed of down moves is increasing. This trend is accelerating. This screams Wave 3 to me, and I would really ask you to think about this fact when trying to pick a bottom or a bounce here.

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Longer Term Projections:

I believe we have a very obvious Head and Shoulders (H&S) setup. I first identified this setup potential here: More Thoughts and Analysis: Timeframes - Bearish, to Bullish ... to Bearish May 17, 09 - LINK in May. I was early on the call and the formation of the head, and yes I do realize early is wrong :). I made another call here This Rally was Pure Weapons Grade Balognium Jun 22, 09 - LINK on June 22 after the top was in and on the way to forming the right shoulder.

I think this H&S setup is key to the market action over the next 6 months. You can see in my projections that this H&S is the first of two, and this also sets up a massive inverted H&S. Read this post for more thoughts on how the fundamentals can help drive this technical setup More Thoughts and Analysis: Timeframes - Bearish, to Bullish ... to Bearish May 17, 09 - LINK

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Sector Analysis:

Anchak and I were discussing a few days ago about the Wave 3 setup (down move) that I am forecasting. He was skeptical yesterday because Health care was not breaking down (and consumer services to a lesser extent). However health care broke down today. In fact all of the sectors are looking weak. As in Oil and Natural Gas in the short term. The US Dollar is not breaking down, but rather is consolidating with bond auctions have generally been pretty good this week. None of this portends well for equities.

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Investor Sentiment via the CPC and the VIX:

The Put/Call Ratio ($CPC) by itself gives you very little knowledge about what option investors are thinking (it is a very erratic number, changing all the time). But what is very useful is looking at the trends of the CPC. Extreme values (usually above 1.25 or below 0.75) are usually found at turning points (when the general investing sentiment is either too bullish or too bearish). From these extremes, the direction of the shorter term Moving Averages can give a clue as to how option writers view the progress of the rally and how they are hedging their bets. Based on the recent trends, it looks like Option Writers (in general) are turning more bearish on this rally.

The VIX has also broken its long term down trend, which is another bearish sign.

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Long Term Projection:

Here is my long term projection. A valid was asked by TastyLunch, if I am such a believer in inflation (which I am), why such a bearish projection for the market? Doesn't inflation help the market? Yes.... it helps it from falling as far as it would otherwise. Here is my synopsis:

- If I thought the outcome was truly deflationary, I would be making a call for the S&P to drop to 133 (during 1929, after the initial 50% drop, the stock market dropped another 80%! over the next few years). 20% of 666 = 133. And no I do not think that is realistic given governement policies. I think something like ~400 on the S&P (4000 on the Dow) is more realisitic
- But what the big drop in the middle of inflation?
- Because earnings still stink!
- Inflation is not enough to keep prices high (I think all the inflated money will find itself in real assets, not the stock market), however, I think inflation will keep prices in the stock market from dropping as low as they otherwise would
- Inflation will also help earnings from dropping in price terms as low as they would go (in nominal terms they will be much lower)
- I have said before, that the market needs to make a bottom in terms of valuation before it can go up again, and historically that is when PE is 6-10.
- Just for kicks, lets use PE = 8 as the bottom.
- Earnings (GAAP) from good analysts (such as Mauldin) are around $40. And for the sake of argument, lets say they stay the same for the next few years (I see a much stronger argument that they will actually shrink, I see no compelling argument that they will grow). But lets say inflation keeps them about $40.
- PE of 8 * $40 earnings = $320 Price of S&P at the bottom
- This is where I get my ~400 estimate for the S&P.
- I think we will have inflation big time, but I think the market fundamentals are so bad that they will fall regardless of inflation
- Indicidentally, my gold argument still stands. Dow at the bottom of ~$4000 (not as bad as an equivalent Great Depression move) still puts Gold at $4000 eventually if you believe like I do that the Dow-Gold ratio will bottom at 1 (or even less).

So that's my story, and I'm sticking to it :)

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Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.