More Thoughts and Analysis: Timeframes – Bearish, to Bullish, ...to Bearish
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.
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.
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 :)
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 ....