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May 17, 2009 – Comments (34)

I have been reading a lot of posts that basically say “Buy now the bottom is in, new bull market!” or “This is a fake Bear Market rally and we are going to crash through 666”. Are either one of these premises right? What if I said ... both. :) Now, the are a HUGE number of caveats in this post with lots of speculation, but lets just take a spin down some of the back alleys of binv’s analytical brain and see what this odd fellow is talking about.

Background

This is basically a continuation of thoughts from my last blog post (Still Bearish: FA and TA on S&P 500, Observations on the Economy). Please read that post first to see where I am coming from. The question that may immediately pop up is, “Hey I thought you were bearish, what gives? Are you changing your analysis?” The answer is an emphatic NO. I stand by all of the analysis from my last post. I am still very bearish on the current rally as it was led by financials, and I stick by my phrase “financials are the cancer of the economy”. But lets take this as a starting point and see where a few extrapolations lead us, shall we?

But First, a Rant

I have seen a lot of articles over the internet (I tend to read A LOT) and a lot of blogs and comments from Caps users where they offer a definite opinions about the future and pass it off as fact / inevitable. I will use a phrase coined by abitare a few years ago (which I love), but changed only slightly. “Anybody who says they know what will happen is delusional, a paid liar, or both”. Nobody, absolutely nobody, has a crystal ball (especially not me). You may have an opinion, it may be a strong opinion backed by facts, and it may even be an obvious conclusion. But at the end of the day it is just a guess. But people tend to like facts not guesses.

So when I hear things like: “Deflation is guaranteed….”, “Inflation will happen…”, “The market will follow this pattern…”, “China will become the dominant superpower…”, “China will collapse…”, etc. without any qualification, it makes me angry. You should always hear things like “My thoughts are…”, “I would guess that…”, “….Just my $0.02”. If I don’t hear that as a reader then I highly discount what is being said, because then I suspect they have an agenda. The author is then trying to convince (and perhaps sell), not to share or discuss.

So once you as the reader make this realization, that there are simply possibilities about the future, not facts / definites, then you can make a leap in thinking and ultimately in your investing. You should never go all-in with 100% of you money on any investment or even any investment theme. E.g. If you are, at the end of the day, a LTBH bull on the market, should you put 100% of your money in long positions? The answer is no. Because no outcome is guaranteed, you should never put all of your money into any one endeavor. This is the definition of gambling.

Instead, I am asking all of you to become good risk managers. Think about the economy, and think about it on different timescales. What is likely to happen 6 months, 1 year, 5 years, 20 years from now? What might this mean for different markets: equities, treasuries, gold, oil, commodities, the dollar, etc. Does it make sense to grow some of your own food to start becoming self-sufficient?

Think about these themes, assign them probabilities, assign them levels of impact, and then deploy your money accordingly. You might not capture the largest possible returns, but you won’t get blindsided because you failed to consider something. Always think for yourself, and then you will always come out ahead.

Back to Our Scheduled Program / POSSIBLE Projections for the Next Several Months

Okay, getting back to the topic at hand. The point of this post is to explore where we are headed. But the main glaring caveat of the projection that will follow is that it is a POSSIBLE Projection. It is speculation, nothing more. There will be some signs that I am looking for that will help to indicate how the projection fits with the price action (Technicals) and Economic Data (Fundamentals) over the next few months, but there is a possible bullish setup that is worth thinking about.

The Bearish (Short Term)

But first we have to talk about where we were and where we are. First this current rally. I believe the current rally terminated May 7.  I have recently revised my Elliot Wave count from the bottom (at 666) to now, thanks to some constructive criticism from GoodVibe (seriously, Thank You). It is slightly different from the one that I had in my last post. It doesn’t change the current situation that dramatically, but it makes this potentially bullish setup even more possible (more in a minute).

Here is the count from the bottom to now. I see a complete 5-wave impulse that forms an (A) leg of a corrective rally from the extreme oversold conditions present in March. Corrections are never 5s completely by themselves, so assuming this count is correct (again, nothing definite, it is simply my interpretation), this means the correction is not over, that this is only part of the overall move.



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Here is another indication that this current rally is over: The action in the Treasury market. Bonds and the stock market are loosely inversely correlated (rarely strong, usually pretty weak), but the inverse correlation lately has been very strong. After the rally got underway, money from treasuries moved into the market in a big way, and the last 5 days money has moving back into Treasuries in a big way. Bond holders (the smart money) are taking money off the table (stock market) and heading back into "safe" Treasuries.

Now this is not the “traditional” bond action that we expect to see, where bond owners are not stock owners, and they rarely mix. It is true that traditional bond holders (bond funds, pensions, etc.) are low risk and do not play in the stock market. And I would agree with the first statement categorically 10 years ago. However, with the huge budget deficits and the ballooning amount of Treasury debt held by foreigners came the proliferation of Sovereign Wealth Funds (SWFs) recently. Many of these guys (Chinese and Japanese especially) were funded mainly by US Treasury debt held by foreign governments. So consider this. When the Fed made the QE offering a month and a half ago, they give these SWFs a risk free way (since the Fed is putting a floor under prices) to “cash out” temporarily. The market was so historically oversold, and at that point it had already rallied 10% off the bottom. The SWFs are looking to make returns, not just to be “safe”. I think it is a no-brainer to see the contribution from this market action. But like all good bear market rallies, they come to an end abruptly. And the SWFs run back into treasuries for some more short term safety. As always, this is just my take :)



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So my contention is that we have seen the top of this rally, at least for the next 4-6 weeks. The technicals show the rally losing momentum, the bond market looks like it is bracing for impact, this rally was lead by financials (which stink) and so makes this rally susceptible to an abrupt ending (just as we had an abrupt beginning), and the amount of bulls blowing their horns on this rally after a 5-day pullback is louder than ever. My Spider Sense in tingling, and this Web Head says we are heading down, it has already begun.

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

34 Comments – Post Your Own

#1) On May 17, 2009 at 6:25 PM, binve (< 20) wrote:

.... Now what’s all this talk about a bullish setup? Okay, here we go.

The POTENTIAL Bullish (Intermediate Term)

First I want to say that I am not an uber-bear. I am a timeframe dependent bear. … and even that is not exactly accurate. I am trying to be a realist. When I do my analysis, I am trying to look at the fundamentals as well as the technicals. And if they are out of whack with eachother, then I adjust my stance. So there are some things I am bearish on for the short term (a few weeks) that I may become very bullish on for the intermediate term (a few months). This brings me to my analysis and the following charts.

I still stand by all of the analysis that I put together in my last blog post. I really think the fundamentals for the economy stinks. And I think this rally was a bear market bounce, technically driven, and nothing more. I mean we had a 45% rally in 2 months with no significant pullback. It doesn’t take the brightest bulb to see that these don’t happen in bull markets. I have looked at all of the bear market bottoms for the last 100 years and absolutely none of them that had a bounce like the one we just had without some significant retest of the bottom (usually 62% to nearly 100% retracement as a retest).

Here is a chart from my last blog post that shows the S&P 500 monthly chart for the last 20 years.



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The bounce occurred on indicator channels on the MACD and RSI and with the Full Stochastics at a lower level than they had been for 20 years. It was simply technically unsustainable to keep dropping. Hence the bounce.

But for the same exact reasons we had the bounce, are the same exact reasons I think we COULD (very conditional, let me explain in a minute) rally more. We are still exceptionally oversold in monthly terms. But I believe the stage could be set for a much larger rally:

First we need a retest. If this rally continues like a shooting star it will burn itself out prematurely. Because there are no fundamentals driving it at the current moment!. But instead, if we pull back we will shake out all of the unhealthy bulls who jumped on in the last month when the rally was already overbought, the same ones who will jump ship at the sign of a turnaround. Once we lose the gamblers and pullback for maybe 4-6 weeks to 750ish, then the stage is set. If Q2 numbers start coming out, and they are better … no, wait, let me be realistic … if they are not as bad as they are now , then we will have just enough of a fundamental reason for the rally to continue. General Pessimism is still at a huge high, and so it will take only the slightest sign of good news (the unemployment rate which will most likely not drop, but perhaps slow down in its growth. The housing market decline begins to slow down for a quarter, the Production Index to turn up slightly, the ISM reports to not be quite so gloomy, etc.). HOWEVER, if the next rally is led by financials again, without any other positive economic developments, then it is completely suspect and none of my projections work, because financials are simply volatile garbage.

I am still bearish on the economy longer term, but I recognize that the current general level of bearishness is supportive of a continued longer term rally (still a lot of dry kindling / bearish sentiment for a fire / bullish spark). But there is no way for it to happen (well, at least I don’t think there is, but that’s just me :) ), without some shakeout of the bullish euphoria that is present in this particular rally right now.

That was long winded, and there are a lot of assumptions and caveats baked into the projection. But here is the count and POTENTIAL projection that I am thinking about. I think it could happen with a shakeout / pullback and then just the slightest upturn in fundamentals next quarter. Read the notes on the chart, they are very important.



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However, in the big picture, it would be just another (albeit bigger) bear market rally. And my fear is that it will suck in a lot of LTBH bulls who won't know when to exit out of it.

Okay, so what about the even longer term picture

The Bearish (Long Term)

No matter what happens in the next 6 months – 1 year in the stock market, I think we are going much lower eventually. Because no matter what “green shoots” show up in Q2, no matter how bullish people get, at the end of the day we still have an economy whose GDP is fueled 70% by consumer spending. And these consumers are going to be under a very large hammer as I explained in my last blog post. And at the end of the day, after Waves [1] and [2] come  Waves [3], [4] and [5]. See below.



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We have room right now right now for a rally up, but the price is just hanging in mid-air, defying gravity, unsupported by any price level. It seem like an obvious conclusion (to me at least) from the Fundamentals and Technicals that we are headed down for the next several years.

Ending Rant and Follow-Up

I always say this in my blogs (I even have a disclaimer at the bottom) that these are my opinions. I am always interested in sharing. I definitely am always interested in discussion (because I don’t have it 100% right, and I am learning / adjusting my views all the time). I am NOT interested in throwing out facts and figures and calling everybody who doesn’t see things my way stupid. This forum (and all of Caps) should be for sharing and discussing, not be a soap box.

If you have a bullish predisposition, don’t take what I am saying and ignore it because it goes against what you think. Take my arguments (which I believe are well-thought out even if they end up being wrong) and look at them and see if they can shape your thinking, maybe add some complexity. Maybe to perform some risk management and perform some hedging in certain sectors.

If you have a bearish predisposition, don’t read what I say and just nod your head. I am mostly assuredly not 100% right. I am bearish long term, but I see this bullish setup. Maybe the next leg down is a good time to cover, and wait to reshort at higher levels? Or maybe you cover and just sit in cash for a little while to see how this bullish setup resolves itself.

But as I have said before, I am not going all in on everything. I am bullish on some sectors for the very long term and so the positions in my investment account do not represent my trading account. I am actually 100% long in my investment account (in gold and commodities) but 100% short in my trading account. Think risk about risk, think about timeframes, and don’t go all-in on any one thesis.

.... Just my $0.02 .... :)

Please feel free to comment, disagree, discuss. This was a long-winded compilation of my current thoughts and the market possibilites that I see now. So 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.

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#2) On May 17, 2009 at 6:52 PM, Seano67 (31.29) wrote:

Very interesting stuff. Great post!

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#3) On May 17, 2009 at 7:09 PM, goldminingXpert (29.58) wrote:

I'm putting the over/under for the rec count on this post at 82.5. Feel free to make your bets. FWIW, I added a rec.

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#4) On May 17, 2009 at 8:40 PM, anchak (99.85) wrote:

Outstanding post...and I am aligned.....

 

Except I see a more flattish {2} in the big scheme of things ( the issue of course is I think, it will happen in real terms - nominally , with inflation unadjusted it may take a very different shape). The fundamentals portend this - basically some improvement and bumping onto the next hurdle. ( Technically given the nature of the last bull ie the 5th.....this 2 is a wave alternate)

The only thing that can change this - is a paradigm change of the global systemic order - whether that be in technology or socioeconomic or medical/breakthru variety - I do not know.

 

 

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#5) On May 17, 2009 at 8:50 PM, awallejr (81.59) wrote:

"I am NOT interested in throwing out facts and figures and calling everybody who doesn’t see things my way stupid. This forum (and all of Caps) should be for sharing and discussing, not be a soap box."

This is why I enjoy reading your blogs even tho I might disagree with some of your conclusions. I suspect many bulls even anticipate some kind of correction, and why not here in light of the good old "sell in May and go away" mantra.

I still think we saw the worse back in March, at least for this year, since I don't see the next GDP Quarters being as horrible as the last 2.  What happens next year will prove important since the private sector really does need to start taking the lead.  And that is iffy at the moment. I do disagree with you regarding the financials.  I suspect you really will start seeing earnings improvements.  July earnings will be interesting.  You have LIBOR still dropping.  I predict (and it is just a prediction) that the pullback in financials now will allow you to make a nice profit in July, should you buy on the dips, when they rise after positive earning reports.

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#6) On May 17, 2009 at 9:30 PM, mistermiranga (94.61) wrote:

binve- great stuff...thanks for sharing the thoughts and charts...

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#7) On May 17, 2009 at 9:42 PM, crystlz (65.07) wrote:

Binve,

Thanks for another great post. The move off the bottom of the next leg down certainly has the potential to be explosive. A person could get steamrolled down there. 1 rec from me. BTW your charts are extremely clean.

peace 

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#8) On May 17, 2009 at 11:00 PM, JGus (28.83) wrote:

Binve - Another SUPERB post! Keep them coming!!!

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#9) On May 18, 2009 at 12:06 AM, ocsurf (< 20) wrote:

Brilliant...I know you like oil, natural gas and commodities (during these times). What companies are you looking further into when we take that dip in a month or so?

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#10) On May 18, 2009 at 12:39 AM, dwot (60.71) wrote:

I think that the market has gone up because people are doing what has worked in the past for some.  I have been told wait for a turn around and then get in.  So I think people have gotten in for this reason.

And another point would be that people are taught buy low and sell high.  Lots of prices look low when they are contrasted to how high they got. 

We have an aging population and I think that some of them have also been waiting for an entry to the market.  A friend of mine was saying the window was a day or two to get into the market after the crash in 87.  He's been more then half cash since 2006 waiting for a buy opportunity.

I think people have gotten in for many differnet reasons, but I think most of the reasons have failed to look at the fundamentals of the economy.

 

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#11) On May 18, 2009 at 3:56 AM, portefeuille (99.60) wrote:

chart for the sensex (India) here (add some 17% due to this) ...

 

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#12) On May 18, 2009 at 5:45 AM, ttboydxb (28.87) wrote:

Very well written, always a pleasure to get your point of view.  I'm not into waves, graphs and charts, but I feel that they do in fact affect the market because so many investors use them.  Therefore I enjoy seeing your side of things, they balance my own opinion!

 

A+

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#13) On May 18, 2009 at 9:14 AM, binve (< 20) wrote:

Seano67, .Thanks!

goldminingXpert, Thanks GMX! LOL! "Step right up, place yer bets!" :)

anchak, Thanks my man, I appreciate that! An I agree, once these shapes are adjusted for inflation, they become very interesting :).

awallejr, Thanks! I too always appreciate your thoughts even if I don't agree them. It is sort of like a slightly modified Ghostbusters quote: "Bulls and Bears, living together! Mass hysteria". :) I absolutely see your case for GDP in the next few quarters. Q1 was just so bad that I can't see to Q2 and Q3 could be so bad (in the near term). This is yet another piece of news that might not be good, but won't be as bad as Q1 and help the rally to continue after a pullback.

I think we disagree on the longer term scale, as per our discussion on my last blog post though.

And you are right, financials may make a good trade after a pullback. But I won't touch them on the long side with real money. Because none of them have any real earnings, and holding them is like holding lit dynamite. Maybe you get from point A to B with no harm and a nice profit. Great!. But maybe halfway through there is another hiccup (like Lehman) you go to 0. I will grant you that the likelihood of that happening after all of the government intervention is less for the next 6 months, but I prefer a safer way to play the risk in the stock market :) Just my $0.02.

mistermiranga, Thanks!, absolutely :)

crystlz, Thanks I really appreciate that. Yeah, I honestly believe we are headed down for awhile, and I am bearish long term. But this bullish setup is an honest assessment. I don't want to get caught by surprise with it, and I don't want anybody else to. In fact, this is a rally I would much rather be a part of! (not like the current one). And I appreciate the compliments on the "cleanliness of my charts" :) I do like clean charts (easier to read the main point). Thanks!

JGus, Hey my man, thanks! Will do!

ocsurf, Thanks!. Yes, I am very bullish on oil and natural gas for the long term, and I think the will participate very well in the potential next rally. In this general environment, I still like the commodites themselves more than the producers. I like the commodity based funds (USL, USO, UCO and UNG). But my favorite producers are COP and STO. I like PBR a lot. And I think many of the CANROYS, which were beaten down a lot, even though they are up huge the last 3 months, are still good values. I would like to see oil and the CANROYS pull back the next 4 weeks. Then I would look at BTE, PVX, PWE, ERF. Thanks (Disclosure: I have long term postions in or have traded all of these companies in the last 6 months).

dwot, Thanks for the comment! Yeah, I agree. A lot of the talking heads are screaming 'buy' so people are buying. I am sure there are bulls who have looked at the fundamentals and interpret them bullishly (whereas I interpret them bearishly), but like you, I think most are not thinking and simply buying because they are told to buy.

That is a good point about the aging population! Yeah, if some people are close to retirement (or were because their portfolio was decimated), some may be gambling on this rally to help make up for some losses. Yeah, that is a potentially bad situation.

I think people have gotten in for many differnet reasons, but I think most of the reasons have failed to look at the fundamentals of the economy..

I defintely agree with this statement. Thanks for the comment!.

portefeuille, I take it you don't agree with my premise :) Actually I have to agree with you. That was an explosive move on the Sensex. Asian markets went from 3% down to almost 2% up today. The futures are all postive today. I am interested to see how this develops. Like I said, I have no crystal ball either :), and I am forced to concede that my projection may be way off base. Thanks man.

ttboydxb, .Thanks I appreciate that! Yeah I tend to do a lot of both FA and TA. Both on the economy and individual stocks. I have developed and used for a while spreadsheets for valuation of stocks (FCF, debt ratio, EV ratios, etc.) But recently the economy and markets are at turning points. And the standard valuations are not as useful when the market is moving so much. That is why I tend to look a macroeconomics more recently. But it is such a big area of study, you really need charts to help make sense of it all (and I don't completely, I am just doing my best :). Thanks man!.

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#14) On May 18, 2009 at 10:33 AM, madcowmonkey (< 20) wrote:

binve- Interesting stuff. While I was reading, the only thing I could think of was how India was going to change things up a little. It is good to have the unexpected happen. I have been patiently waiting and waiting and waiting for the time I feel it is right to buy long term again. I just keep getting kicked around on what I think might happen. It is really crazy with the fundamentals and the actions of the markets. Very humbling I might add (for me anyways). You bring up some good discussion points on your blog.

Here: "If Q2 numbers start coming out, and they are better … no, wait, let me be realistic … if they are not as bad as they are now ,"

Does it not seem like people are ignoring the bad signs and just enjoying the little bit of not so bad numbers coming out. Take the financials, we all know the numbers they came out with were way off base and that they did not include all the write downs. The financials are so heavy in the mortgage/housing related assets that when the foreclosures are not hitting highs and they start to come back to reality, maybe the banks will be a safe bet. I am not a trader and I don't pretend to be one on caps anymore. Your chart for long term bear seems to be inline with my thoughts, but without the longevity. I am still hoping the gov does the right thing to get this over with sooner rather than later, but I have some serious doubts. At this point I feel that the gov has more push/pull on the market that any of us really can try and predict.  Case in point: India. Off the rocking chair and into the spot light. 

all the best.

BTW- I went to Manhattan last week and that place was dead at 3 in the morning. Maybe a sign of discretionary income getting closer to zero.

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#15) On May 18, 2009 at 11:58 AM, portefeuille (99.60) wrote:

However, with the huge budget deficits and the ballooning amount of Treasury debt held by foreigners came the proliferation of Sovereign Wealth Funds (SWFs) recently. Many of these guys (Chinese and Japanese especially) were funded mainly by US Treasury debt held by foreign governments. So consider this. When the Fed made the QE offering a month and a half ago, they give these SWFs a risk free way (since the Fed is putting a floor under prices) to “cash out” temporarily. The market was so historically oversold, and at that point it had already rallied 10% off the bottom. The SWFs are looking to make returns, not just to be “safe”. I think it is a no-brainer to see the contribution from this market action. But like all good bear market rallies, they come to an end abruptly. And the SWFs run back into treasuries for some more short term safety.

I am not so sure non-US investors will run back into long dated U.S. Treasuries. Have a look at this article:Fed plays proxy for China

 

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#16) On May 18, 2009 at 12:13 PM, Londamania (63.81) wrote:

Great post Binve!  :) 

I was pondering the last few weeks about why the TA charts seemed to be breaking down of late (meaning the market was in a nice pattern for a while but in the last few weeks the TA approach was...well just not working shall we say) and I think it comes down to news.  In the current market environment we are in things are just wired into the news and really amp on it.  The TA analysis can get you to a decision point and then you need to see (or predict) how the news breaks and that over-rides the technical tendency.  At least it seems to be that way right now.  So I know trading the news is bad but in todays market - ignoring the news will lead to impartial results. So...short term it would be very interesting to see some EW graphs with near term major news milestones thrown in - and put them in the last month or so and see if they pop up where the TA charts broke down.  I think they will.

So now we get to long term and I am looking at your long term bearish graph.  Assuming we get back to 750 short term I can see a lot of people coming back in figuring to get back in on the next bounce. Any amount of decent green shoot news a few days in a row could likely abort the descent and start a rise up - just enough to draw in a lot more bulls quickly especially any who missed the last one in March.  I think we will see a 100 pt S&P rise REAL quick once this process starts.  Then I can really see your rise up to 2 as the world economies settle down and some stability sets in.  Still as you say not supported underneath with sound value but less unkowns, some green shoots, and a lot of money looking to play and feeling safe.

So then what happens at 2 or S&P 1200 6-9 months from now?  Market will be fragile I suspect and will have been for a while.  I look to some geo-political event to set it off.  My guess is Iran and/or Pakistan or both.  They are heading for (or already in and/or causing) trouble and in the wrong wrong area of the world.  Some conflict spreading across the Middle East area originating from these two centers, with us essentially broke and I think done playing in that area of the world (at least for new conflicts) would be the hammer to take this down I think - if things play out as you describe.  If it's early next year and general war and unrest across the middle east is happening - get to cash and stay there for the ride down!  lol

Interesting that your bottom area first tests in 2012 on your chart.  That's a popular date for many doom sayers :)

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#17) On May 18, 2009 at 12:36 PM, binve (< 20) wrote:

madcowmonkey, My man! How have ya been!. Yeah, that was a very interesting shake up this morning :)

I have been patiently waiting and waiting and waiting for the time I feel it is right to buy long term again.

I know what you mean. Because ulitimately, I too would rather be a bull. And for the VERY long term (next several decades) I am. I have stated that in my investment account that I am in gold and oil. Why? Because I am bullish on the very long term prospects for the economy of the US and the world.

.... Now that might seem odd, because aren't all the people who invest in gold assuming the world will end? The answer is no, at least for this gold investor. I invest in gold not because the world might end, but I invest because I firmly believe it WILL NOT!!. If I was uber-bearish for the very long term, I would build a bunker underground, stocked with years of food and buy guns. Gold? For the end of the world? It makes no sense. Why would a useless shiny metal rock be something to collect if civilization ends?

It is the same thing with fiat currency (such as the US dollar). If you really thought the world would end, why collect little pieces of green paper with faces on it? How is that possibly useful? If there is no government to give you goods in exchange for it, then there are better items for a bunker mentality.

So I invest in gold because I am an optimist.

I am not bullish on the US government. I think they will inflate the dollar into worthlessness (or devalue it highly at least). But ultimately economies WILL recover, and I want to trade my gold in for something useful. Shares in a profitable alternative energy company, or a water from seawater plant to sustain drought countries, or any number of productive future endeavours.

Gold is simply a way to maintain purchasing power as the worlds economy goes through this large contraction. So as an optimist, you should invest in gold :) Just my $0.02 (silver coins of course, not actual pennies ... :) )

But that is a very interesting observation on Manhattan. Consumers are getting hammered, even in the Big Apple.

portefeuille, Hey man. Yeah I have talked about Treasuries many times on my blog. It is an exceptionally important market to watch. And I only conditionally agree with your statement.

We are in a Treasury bubble. At some point, it will pop. And so I am very long term bearish on US Treasury debt. But it will not pop now. First there are too many parties (with most of the worlds money) interested in keeping that game going.

And of course the Fed is playing proxy for China. I even mention essentially that in my quote which you used in the comment. The Fed is putting a floor under prices right now via QE. It is sending artificial signals to the market, in an attempt to cap interest rates.

And eventually that game fails.

But the question you need to ask is? Which fails harder: the stock market or the bond bubble?

This is also a timeframe dependent answer.

My guess is that right now (and especially if we rally to about 1200 on the S&P) stocks have much longer to fall. But they will recover quicker (make a bottom before Treasuries do when the Treasury bubble bursts).

So this is my take:

SWFs will participate in the stock market rallies when it is advantageous to do so (after confirmed rallies). But once the sense a top, they pullback into Treasuries for short term safety. The Treasuries will lose value as the bubble unwinds, but it will be a slow bleed. So when the market goes through its big Wave 3 crash (as I am speculating it will, again, just my opinion), Treasuries will be a relative safe haven, losing value more slowly than the stock market will during the same time period.

Thanks for the thoughts!

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#18) On May 18, 2009 at 12:45 PM, binve (< 20) wrote:

Londamania, Thanks! I always appreciate comments from you!.

Yes, I completely agree with you observation on news. Usually TA will trace out its patterns independent of news, but the market has been sensitive in both directions (up and down) lately.

As far as what happens to make [2] terminate? Who knows, that is impossible to speculate at this point. War? Maybe. I think it will be something less dramatic though. A lot of the "green shoots" being shown to be much less important than they were portrayed in the media I suspect. But we will see :).

Interesting that your bottom area first tests in 2012 on your chart.  That's a popular date for many doom sayers :)

LOL! Wow, that was completely non-conscious on my part. I was just going by the length of the waves in term of distance and time scale, and this just seemed to fit. I have a lot of different takes (personally) on what 2012 means, but none of it means a literal end of the world (as far as I am concerned).

I always remain the very long term optimist (see my response to madcow above). :) .

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#19) On May 18, 2009 at 1:17 PM, darroj (31.18) wrote:

Thanks Binve! I always check to see when people on my favorites have made new blog posts and I'm never disappointed by yours!  I hope you're wrong about S&P heading below 666 (I am not nearly as dedicated or experienced enough to form a legit opinion)

Just a small tidbit, my consumer spending has increased in the last few years.  As a recent college grad, I now have a fairly stable job and I have money for the first time in my life. Additionally, retailers are offering better deals, enticing people like myself.  While I don't necessarily represent the average American (as far as the ratio of income vs consumer spending) there are more than likely other people similar to me.  Obviously, this is strongly tied to unemployment, which I'm planning on using to monitor the overall condition of the economy (though with some understandable delays, partially wrong information... etc.)

Thanks again man!

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#20) On May 18, 2009 at 1:18 PM, portefeuille (99.60) wrote:

I think the article I mentioned above is a little long.

Here is the end of it:

--------------------------

The buying of longer-dated Treasuries by the Fed and potentially by domestic US investors would have the desirable effect of lengthening (flattening) the presently steep yield curve on sovereign US debt, making it both easier and cheaper for the Treasury to roll over the huge sums of maturing short-dated debt into longer-dated debt. That would also work to buy some time for the East to convert longer-dated assets into short-dated assets as its two de facto proxies (the Fed and US investors) carry the load of flattening out the yield curve and keeping longer-dated yields low.

The ultimate victor in the Fed/bond-market clash of wills will be the clever players in the East who see their holdings protected, at little cost and relatively low risk to themselves, while they work at an accelerated rate and in a multipronged strategy to divest of the riskier assets, accomplishing a sufficient measure of reduction of their exposure to dollar risk before the currency takes the awful brunt of the exceedingly dollar-debasing policies enacted in Washington during this crisis

-------------------------- 

The author suggests that the strategy of China and other Asian investors might be:

Use the QE lift to move from long dated to short dated U.S. Treasuries to then have the ability to move out of the dollar much easier if the dollar falls.

This was in March: China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries.

I think they are still worried ...

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#21) On May 18, 2009 at 1:59 PM, madcowmonkey (< 20) wrote:

binve- doing really well. I am kicking off my 2 day work on the second week of June. Only bad part is more traveling will be coming on right now.

Next several decades is my same logic. Buy it and leave it be and don't think too hard on it. I still like that philosiphy. It is too bad some investors have been burned recently and got caught up in a downturn without realizing it. But that is why I am on CAPS. Never hurts to hear others opinions.

It looks like the discussion with Quantitative Easing is on point today. That is alwasy a fun discussion....just because of the name.

BTW-thestinkyfeet might be kicking mine and your butt soon:)

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#22) On May 18, 2009 at 2:43 PM, binve (< 20) wrote:

darroj, Hey man!. And I am always glad to get responses from my faves :).

As for 666, yeah, I just don't see any fundamental or technical reason for it to be a bottom. I really don't. I think the most probably outcome is a break below them was we try to find a true bottom. True bottoms will not be able to be identified as such. The will be a lot of grinding, and I highly doubt it will be V-shaped. Just my take.

I am very glad for your situation!. I do think you are in the minority when it comes to discretionary income. I think you are in a great position now, and I hope that you avoid debt for the next few years (no mortgage, no car payment (buy used), keep credit cards paid off, etc.). Sorry for the bit of unsolicited advice. But if you do that and save in assets that hold their value, I think you will be in an awesome postion several years from now when we do start to actually bottom. Thanks for the comments man!

portefeuille. I really do enjoy the points you make! I do agree with your observation of short dated treasuries. SWFs and foreign governments are beginning that converstion process (in fact, my Treasury chart above has shorter term instruments, not just the long bond, but I looked at T-bills too and they showed similar patterns). But I do not think there will be a mass exodus out of long term treasuries now. Because there is so much reserve wealth stashed in them. A treasury collapse caused by governements performing the conversion too fast would just hurt those governments reserves. There will be a great unwind. But as it is still in its early stages, I think it will be somewhat orderly for awhile.

Speaking of QE, check out this older blog post of mine, I really think you would enjoy it: Quantitative Easing Explained. Thanks man!

madcowmonkey. Hey madcow, that is awesome man! You are doing it, and I am so glad for you. Yeah, there are some assets that do not worry me in the slightest to hold for the long term. And those are the ones I invest in. Everybody should like about their own investing thesis and do the same. Never going all-in, and putting in some well thought out hedges if need be. But to really think about the future and become comfortable with it.

Yeah, I love QE discussion, becasue I love pulling out the QE link I just posted above. That article is hilarious!!!

Yeah, very negligent on stinkyfeet duty. I think I have been demoted to toe-jam :) . Take care man.

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#23) On May 18, 2009 at 4:54 PM, phalkor (74.91) wrote:

I'm a ham and cheese sandwhich!  GOOD SHOW!

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#24) On May 18, 2009 at 10:46 PM, RootnToot (30.07) wrote:

B, logic and common sense are essential to life as well as investing, and you state your case with both eloquence and logic.

I would like nothing more than to buy into this rally right now; but, I am just not convinced and I will not be played for a fool. I live in Michigan and work for an auto supplier. Let me tell you, not matter what the media says, there is no recovery in these parts. Nuff said!

Definitely nothing logical about this market right now.

Once again, two fools up and a rec from me.

 Thank you for your hard work and your willingness to share.

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#25) On May 19, 2009 at 1:05 AM, tahoestock (30.22) wrote:

binve...a great followup to your previous post (and these guys provide a worthwhile discussion too).

My $.02:  My count for wave{A} was similar to yours, at least until today. Now my charts show the possibility of wave(5) extending further (of course that screws up wave(3) as it becomes the shortest impulse wave...a EW no-no).  Remotely then, wave(5) becomes (3), wave(4) ends at 890, and, God forbid, we begin building wave(5) again!  

Depending on Tuesday/Wednesday action I'll post a chart.  Hope I'm wrong.  I'm 30% short, 70% cash in my trading account but may see an opportunity to add, anticipating wave{B}.

Your posts are always #1 reading here on CAPS for me.  Continue the great work.   

 

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#26) On May 19, 2009 at 1:24 AM, arabianmoney (< 20) wrote:

Last week President Obama's economic advisor trashed the green shoots idea and anybody who is bullish ought to read this, see: 

http://arabianmoney.net/2009/05/18/obama-adviser-says-green-shoots-dead/

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#27) On May 19, 2009 at 9:13 AM, binve (< 20) wrote:

phalkor, ... Right on . (?) .... . Uhhh, thanks! :)

RootnToot, Thanks man. Like you I would love to be a bull, but I don't see any fundamental reason to do so right now. I have to call it like I see it, and this is how I see it. I hear you about Michigan. I grew up there and I still have a lot of family in Detroit. Several of my uncles are out of work. It is really though right now. My dad also retired from GM last year (after working for them literally all his career). I am so glad he got out before the latest round of cuts the last couple of months. He is worried about his pension. It is really tough right now.

I am very happy to share my thoughts, and I am always happy to hear yours. Thanks man!

tahoestock, Hey tahoe!. Thanks man I appreciate that.

Russ, has been carrying an alternate count similar to the one you are describing above. Please put up a chart, I would love to get your take on this.

I have a near term wave count too for the wave action. And so far it fits with my projection. But I think it is too early to call. Check this out, this is an excerpt of what I posted in the CIL.

Okay, so here is my take on the last 5 days, within the bigger context. Sorry on the wait, but I had two different styles on 3 different charts, it was confusing :)

Count from the bottom:
Read this first. Read the notes on the chart (very important!)
http://farm4.static.flickr.com/3138/3542837981_713ba81e2e_o.png

Projection:
Read the notes, especially about H&S #1 and the 50 day MA!!
http://farm3.static.flickr.com/2296/3543646802_4e112eedfc_o.png

Recent Count:
First thing we need to realize is that {A} is impulsive and done. {B} on the other hand in corrective. So while there will be impulses in {B}'s subwaves, we need to realize that the overall count will be a 3!! So I think the beginning counts are shaping up like this:
http://farm3.static.flickr.com/2269/3542838055_79b078f84b_o.png


BTW, I am still bearish short term, and there is nothing about the price action today that has changed that opinion.

Thanks tahoe, I really do appreciate that. Thanks for all the kind words, support, and fantastic ideas. I love our discussions!

arabianmoney, Thanks for the link, I will check it out!.

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#28) On May 20, 2009 at 12:11 PM, StopLaughing (< 20) wrote:

Instead of a double top at 1500 on the S&P we could have a long term trading range of roughly 750 to 1500 spanning the next  decade or more.

This is a thoughful post, but my observation of Eliot Wave interpretations suggests that there is little concensus among practioners on the wave count. 

To me it looks like trying to force fit the theory to the data. When a prediction does not work the general theory is not revised for the reality presented by the data. Instead, another attempt (a reinterpretation) is made. The problem may not be with the interpretation. It may be that the theory does not fit the current market conditions.

Many traditional fundamental and technical tools are not predicting that well right now. Why would Eliot Wave be any better?

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#29) On May 20, 2009 at 12:19 PM, binve (< 20) wrote:

StopLaughing, Thanks for the comment. But EWT is not a singular organism with one unambiguous signal. It is a tool, and as such it is open to interpretation. I said very clearly (repeatedly) in the post that this was my POSSIBLE projection. I have said repeadtedly that absolutely nobody has a crystal ball. I have said repeadtely that is is only my interpretation of a possible setup that I see.

I am not trying to convince anybody to do anything. Just sharing my interpretation and the possibility that I see. That is all. It is up to you to listen to it or discard it. Do with it what you will..

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#30) On May 20, 2009 at 6:23 PM, arboretum (28.37) wrote:

Sorry I was late to this, but better late than never. Binve, you kick the pants of the financial journalists. Which I assume is because you are not one.

Londamania's comment on news has made me think. Not only is current sentiment being driven by it, but I think it could take either seriously bad news or quite a bit more time to set the expected, significant drop into motion.

Otherwise, the bulls are still buying up the pullbacks, every time, even when this looks distinctly unwise. And it looks like more sideways churning for the summer, with short interest still declining. Anyone?

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#31) On May 20, 2009 at 7:04 PM, binve (< 20) wrote:

arboretum, No worries! Glad to have you anytime :).

..you kick the pants of the financial journalists. Which I assume is because you are not one. 

LOL! Nope. Just a humble mechanical engineer :).

As far a drop to the bottom taking a long time or needing a really bad news catalyst, I am not sure I agree. The price action since May 7 is not bullish at all (IMO). camistocks is right on when he says that it is still riding the 20day MA and that is bullish. But I am looking at the way the price action has developed since May 7 (see below).



Enlarge

It looks very bearish and corrective to me, not at all bullish. It is making new lows off the peak. And not only did the retest not make a new high, it failed at a pretty important resistance line. As always this is just my interpretation (and I reserve the right to be completely wrong) :).

But this is not making me nervous and I am still fully short in my trading account, FWIW. Thanks for the comments!.

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#32) On May 20, 2009 at 7:09 PM, binve (< 20) wrote:

arboretum, Just for clarification. I agree that the price recently has been particularly sensitive to news (which was Londamania's point, and I agree with it), but I think we are observing a technical breakdown now that looks (to me at least) very bearish. And it started to go through the breakdown when the news was realtively good. This is why I look at other sectors too, to help me find tops (like Treasuries as I mention in the orginal post). Thanks!

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#33) On May 21, 2009 at 8:27 PM, XMFSinchiruna (27.53) wrote:

Amazing post! Thanks so much!

Here are my thoughts in a nutshell. :)

And this, from the related blog post:

We have reached a watershed moment in the equity markets, and I sincerely believe there has been no more crucial moment since before the onset of this crisis for Fools to consider the perspective of these three financial sages. The subject matter is not uplifting, and frankly we've all had enough doom and gloom over the past couple of years to last us a lifetime, but that does not change the facts.

The dollar is severely impaired, and the break in the USDX below 82 and then 81 without so much as a blip of support is disconcerting even to this Fool. Fools with no allocation in equities designed to provide some level of defense against a long-term deterioration in the purchasing power of the dollar are quickly running out of time in which to do so, in my opinion. I recommend gold as the best possible dollar hedge, although silver may outperform even gold.  I do not recommend leveraged ETNs or any such vehicles at this stage of the crisis, since often those are based themselves on the very derivatives that lie at the core of the problem. Any "core" commodity ... the things people can't really live without, will provide some measure of defense, which is why Jim Rogers is such an advocate for agricultural exposure here. Some of the others, like natural gas, coal, and copper... could experience some real volatility in the short-term as this rally unwinds and we get perhaps even another forced liquidation event where hedge funds sell out of recently established long commodity positions. Of course, gold and silver could move around a lot in the short-term as well, but the past couple of days provided a significant technical break-out that could just as easily continue unfettered to the $1,050 mark or so.

I promise to always write what I see based upon the evidence that I spend 18 hours per day uncovering. I apologize in advance for the less-than-positive nature of much of the material I'm presenting, but if my perspective and that of the individuals highlighted in this article can help Fools to prepare accordingly, then perhaps we can erase some of that negativity. This continues to be a labor of love for me, because I know I'm skilled at processing large volumes of information and discerning patterns that reveal elements of the macroeconomic trends underway. I hope some Fools will heed my caution and gain some precious metals exposure, and I hope that Fools will continue to prioritize being well-informed over being reassured. Thank you, as always, for reading and sharing your perspectives, and for goodness' sake please be careful out there!!

 

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#34) On May 22, 2009 at 8:49 AM, binve (< 20) wrote:

TMFSinchiruna, Hey Sinch! Thanks, I really appreciate that! I too am still firmly committed to gold and commodities in my long term portfolio. CEF continutes to be my biggest holding. I still read and rec all of your blogs and articles. I am very grateful for all of your thoughts, and I know there are many other Fools here who feel the exact same way :) Thanks!.

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