Wednesday, March 30, 2011

The Bear Market So Far

In the last post, we have established that we are in a Grand Supercycle bear market. The goal is now to explore how the bear market has unfolded so far and what the expectations are in the years and decades ahead. We know that we ended a Grand Supercycle degree advance in 2000.

From the start of the bear market, there was a decline that took place from Jan 2000 to Oct 2002, for a total of 34 months. This part of the decline would likely be Cycle wave a. Here's the chart of the DJIA during that period:

Notice that Primary wave [A] of Cycle wave a took the form of an expanding leading diagonal with a strong under-throw in Intermediate wave (5). In the S&P 500 and the Wilshire 5000 Primary wave [A] of Cycle wave a took the form of a five wave impulse. In the Nasdaq, Cycle wave a took the form of a five wave impulse. After the low on Sept 2001, a bear market rally, Primary wave [B] of Cycle wave a, unfolded in three waves. After the bear market rally ended, a five wave downward impulse followed, completing Primary wave [C] and therefore Cycle wave a.

After the initial leg down, markets rallied strongly from Oct 2002 to Oct 2007, for a total of 5 years. Here's the charts of the DJIA and the Nasdaq:

Nasdaq,  2000 - 2011

DJIA,  2000 - 2011

The difference between the two charts is that the DJIA reached new highs in 2007, but the Nasdaq didn't. This type of non-confirmation between the indexes means that the rally from 2002 - 2007 in the DJIA (and the S&P 500 and Wilshire 5000 as well) is Cycle wave b. Additional confirmation is the DJIA/gold ratio, which didn't hit a new high in 2007. Bull markets go up in real terms as well as nominal terms.

The implication here is that Supercycle wave (a) is taking the form of an expanded flat in the DJIA, S&P 500, and the Wilshire 5000, but taking the form of a zigzag in the Nasdaq. An expanded flat has a 3-3-5 wave pattern. We don't yet have a satisfactory 5 wave structure in Cycle wave c.

Within Cycle wave c of Supercycle wave (a), Primary wave [1] has been completed, and we are very close to completing Primary wave [2]. Next up will be Primary wave [3].

Here's what has unfolded so far since the bear market started:

Supercycle wave (a)   Jan 2000 - ???,   "The Great Deflation"

Cycle wave a             Jan 2000 - Oct 2002,   Dot-com bubble bursts
Cycle wave b             Oct 2002 - Oct 2007,   Stock market and housing bubbles 
                                                               (Housing bubble bursts in 2005)
Cycle wave c             Oct 2007 - ???,     Credit, commodity, student loan, 
                                                            and stock market bubbles burst.

Primary wave [1]        Oct 2007 - Mar 2009,  Stock market and oil bubbles burst
Primary wave [2]        Mar 2009 - ???,          Early Obama Administration Period
Primary wave [3]        ??? - ???,                   Late Obama Administration Period
Primary wave [4]        ??? - ???
Primary wave [5]        ??? - ???

It is clear that the so-called "Great Recession" is actually Primary wave [1] of Cycle wave c of Supercycle wave (a). In other words, the events of Primary wave [1] is just a teaser-trailer preview of the hard times that are yet to come, which will start when Primary wave [3] begins to unfold. When Primary wave [3] starts, deflation will unfold in full force, hence the name "The Great Deflation" for the period associated with Supercycle wave (a).

In the next post, we'll explore a model that will give a hint on how Primary wave [3] of Cycle wave c will unfold.

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