Santa Claus Rally in Sight

A Santa-Claus rally, which is the third and final phase of the three month long reprieve period known as Minor wave 2 up, is on the short-term horizon. This is an update to an earlier blog entry in which a case was made for the rally in October 2011 being just the first part of Minor wave 2 up on the basis that it is all the same market in a deflationary scenario as proposed by Elliott Wave International several years ago.

Here are the updated charts of the DAX and the CAC-40.

DAX:

CAC-40:

Both the DAX and the CAC-40 rallied from the late September 2011 low in five waves, which indicated that the late October 2011 high represented the end of just the first part of Minor wave 2 up. The rally was followed by a decline that unfolded through most of November 2011. In both the DAX and the CAC-40, the decline unfolded in three waves and ended above the late September 2011 low. The sharp rally that started on Monday is the start of the last part of Minor wave 2 up in France and Germany, namely Minute wave [c] of Minor wave 2 up.

Here are the updated charts of the FTSE-100 and the DJIA:

FTSE-100:

DJIA:

Both the DJIA and the FTSE-100 rallied from the early October 2011 low in three waves. Both the DJIA and the FTSE-100 are still in the second part of Minor wave 2 up, namely Minute wave [x] of Minor wave 2 up. The decline from the late October 2011 high unfolded in three waves through most of November 2011.

The preferred scenario is that Minute wave [x] of Minor wave 2 up is a double zigzag with the second zigzag taking the markets far enough down to fill the gap at 1151 - 1155 in the S&P 500. Within Minute wave [x], the first zigzag, Minuette wave (w) was completed last Friday. There was a strong expectation for Minuette wave (x) to unfold as a sharp rally. The expectations were dramatically fulfilled with the DJIA doing a 250 point gap up on Monday morning. Minuette wave (x) should be completed tomorrow (perhaps a 150 - 200 point gain in the DJIA for the day). The sharp rally will be followed by a second zigzag, Minuette wave (y), which is expected to unfold as a sharp decline, completing Minute wave [x] around December 6, 2011 with a downside target of 11050 in the DJIA and 1125 in the S&P 500.

The Santa-Claus rally is expected to start on December 6, 2011 on the DJIA and the FTSE-100, representing the last part of the three month long reprieve period. The rally is expected to unfold in three waves and take the DJIA just above 12000 in early January 2012.

A bullish intra-market divergence is forming, where the DJIA falls below the late November 2011 low in early December 2011, but the low isn't confirmed in the FTSE-100, the DAX, or the CAC-40. The end of Minor wave 2 up may be characterized by a bearish intra-market divergence in which the CAC-40 and the DAX rally above their late October 2011 highs, but the DJIA and the FTSE-100 fail to do so.

Visions of 2068

There have already been visions of what the United States might look like in the future if the "Occupy Wall Street" protests successfully bring about a "peaceful revolution" in the nation. Many people who see such a scenario envision change being achieved within the next several years. The socionomic model, however, hints that such change is decades, not just years, in the future.

Governments generally stay their course all the way to the bottom. The bottom, in this case of the current bear market, is the orthodox low point of Grand Supercycle wave [IV], which is projected to end in 2055. Only when the bottom is reached will governments start making the hard choices. Here are three examples:

1 -- The original Bill of Rights were introduced in Congress in 1789 and went into effect as amendments in 1791. The Constitution of the United States was adopted in 1787. The Bill of Rights were instituted shortly after the start of Grand Supercycle wave [III] in 1784. This event followed the end of the "Modern European Major Depression" that spanned from 1720 to 1784.

2 -- Reconstruction was instituted in 1865 and continued until 1877. This period represents a fundamental transformation of society in the United States in the aftermath of the Civil War. The Reconstruction was instituted shortly after the start of Supercycle wave (III) and followed the end of the "Long Depression" that spanned from 1835 - 1859.

3 -- The New Deal consisted of a series of economic programs aimed at getting the US economy back in gear. The New Deal started in 1933 and continued through 1936. The New Deal was launched shortly after the start of Supercycle wave (V) and followed the end of the Great Depression that spanned from 1929 - 1932. The best known parts of the New Deal are the Glass-Steagall Act (regulations on banking, was repealed in 1999), the Fair Labor Standard Act (sets a federal minimum wage and caps the work week at 40 hours a week, expected to be repealed in 2017), and the Social Security Act (this implemented Social Security for the elderly, expected to be repealed in 2017).

The visions and goals of "Occupy Wall Street" are a hint of what the United States might look like in the future. One of the leading activists of the "Occupy Wall Street" movement is Michael Moore, who recently put an article on Daily Kos, spelling out some of the goals of the movement. One of the goals is the implementation of a Second Bill of Rights that was first proposed by FDR in 1944, which would serve as an "economic bill of rights" that guaranteed the following:

1 -- Employment with a living wage
2 -- Housing
3 -- Medical Care
4 -- Education
5 -- Social Security
6 -- Freedom from unfair competition and monopolies

Once the current bear market is over, a new bull market, Grand Supercycle wave [V], will start. Governments won't start making the hard choices until the "Crisis of the Western World" has ended. The vision of reform in the United States by FDR in 1944 and Michael Moore from 2007 to present will eventually come to pass. Implementation of such reforms is expected to start in 2060 and could be completed in 2068.

Social Mood Undercurrents

Even as the three month long reprieve period continues to run its course, we continue to see more and more undercurrents of bearish social mood underneath the surface, ready to erupt to the surface with the advent of Minor wave 3 down in January 2012.

The European debt crisis is still a concern even as it remains in remission (just barely, it is so fragile that it could give out at any time), yet there is evidence that the contagion is starting to spread all the way to the core of the European Union. There have been a number of developments in the last several days:

1 -- Interest rates on Spanish, Italian, Greek, Portuguese, and even French bonds continue to rise, making it more expensive to borrow. The effect, of course, is to make the existing debt a heavier burden to bear as the interest payments on the debt continue to rise. As taxpayer money continues to dry up in the coming months and years, a default is just a matter of time. The most likely scenario is for one or more of the PIIGS to default on their debt as we approach the center of Minor wave 3 down in March / April 2012. Greece is already perilously close to default.

2 -- The sovereign debt crisis has already taken a toll on governments in the European Union. The latest development is a massive wave of voter anger effectively removing the Socialist party from power in Spain and bringing conservatives into power by a substantial margin. This unfolded quickly on the heels of a government upheaval in Italy and Greece in which technocrats gained power. In addition, Greece is now facing the same type of strife and discord as the United States as partisan gridlock has put the country on the verge of a virtual government shutdown.

3 -- France is now facing the threat of a credit rating downgrade as Moody's has downgraded the outlook on the country's credit rating due to rising interest rates. This development is a very strong indication that the debt contagion is spreading to the core of the European Union. France is one of the last of the larger nations on the planet to still have a AAA credit rating.

4 -- The 2008 parallel continues to play out in the United States. On the heels of the collapse of MF Global and the bankruptcy of Jefferson County, Alabama, the city of Detroit, Michigan is on the verge of running out of cash, with bankruptcy to likely follow during the center of Minor wave 3 down. Another recent development is the US Postal Service bleeding cash at a rapid clip with default in the near future. The US Postal Service will almost certainly be in need of a bailout during the center of Minor wave 3 down.

We are about halfway through Minor wave 2 up with the "Santa-Claus rally" poised to start in early December 2011. Even as the reprieve period continues to run its course, undercurrents of bearish social mood simmer underneath the surface with financial fault lines in both Europe and the United States ready to go critical.

Pitfalls in November

We are about half way through the three month long reprieve period known as Minor wave 2 up. Reprieve periods do not mean that we will get "rainbows and unicorns", it means a period where conditions temporarily improve but the larger bearish trend in social mood is expected to return with a vengeance after the bear market rally ends. Reprieve periods can still be riddled full of pitfalls. We saw an example of that case in April 2010 to June 2010, during Intermediate wave (B) of Primary wave [2] up (Mar 2009 - May 2011) when the European debt crisis started to rear its ugly head for the first time.

The current reprieve period has definitely been riddled full of pitfalls with most of them occurring after the second part of Minor wave 2 up (Minute wave [x] for the DJIA, S&P 500, and the FTSE 100, Minute wave [b] for the DAX and the CAC-40) started. Here is a list of some of the pitfalls that have occurred:

1 -- Interest rates on Italian, Spanish, and even French bonds have been on the rise, intensifying the pain of the European debt crisis. The debt crisis is still in remission, but is expected to return with a vengeance in January 2012 (if not sooner).

2 -- Mass police crackdowns against the "Occupy Wall Street" protests unfolded a few days ago with the involvement of the Department of Homeland Security. The crackdowns were mostly a show of intimidation as legions of police officers in full riot gear were deployed in a number of major cities to clear out the protests.

3 -- A version of the "Internet Blacklist Bill" with the name "SOPA" is moving through Congress and it has bipartisan support. This is a blatant form of authoritarianism as the law can be used to shut down large blocks of the Internet under the pretense of fighting piracy, which would result in the Internet becoming increasingly fragmented over time. As I discussed in an earlier blog entry, the bill is mostly supported by the top 1% and it may be an indication that governments are making their move to break the back of the "Occupy Wall Street" protests as the law can result in shutting down Facebook, Twitter, and You Tube (all three have been utilized by the OWS movement).


We are in the second phase of the reprieve period. Here is a chart of the DJIA showing the projected wave path of Minute wave [x] of Minor wave 2 up. Minor wave 2 up appears to be tracing a double zigzag.

The preferred scenario for Minute wave [x] is a double zigzag with the first zigzag, Minuette wave (w), just about done and the second zigzag to take the markets far enough down to fill the gap at 1151 in the S&P 500 (which would be the equivalent to 11100 in the DJIA).

A sharp rally, which would be Minuette wave (x) of Minute wave [x], should unfold next week, pushing the DJIA up roughly 500 points to around 12000. This should be followed by a sharp decline in three waves as a second zigzag, Minuette wave (y) of Minute wave [x], takes the DJIA down to around 10950 and the S&P 500 down to roughly 1125 by early December 2011.

A Santa-Claus rally, which would be Minute wave [y], should unfold through December 2011 and into early January 2012, completing Minor wave 2 up with a target of 11950 in the DJIA and 1260 in the S&P 500. The downward momentum associated with Primary wave [3] down is expected to re-assert itself in late December 2011, creating the appearance of a running flat in which Minute wave [y] falls short of the peak of Minute wave [w].

Limits and Conservation

Politicians continue to focus more on limits as the larger bear market continues to unfold. Back in July 2011, the GOP advanced the Cut, Cap, and Balance bill during the debt ceiling crisis, which was approved along party lines in the House, but was scuttled in the Senate. The formation of a "Super Congress" was a result of a debt ceiling deal, which has been tasked with cutting the deficit by over a trillion dollars over a decade.

Just four months later, the "Super Congress" has been unable to reach a deal on a deficit deal as strife and discord continue to cause division in the committee. In spite of the increase in strife and discord, the austerity trend is spreading beyond the red states. Even some blue states are participating in the austerity trend. A case of point is Gov. Chris Gregoire (of the state of Washington) pushing for $2.3 billion in budget cuts that will have a substantial impact on the state's subsidized health care, increase class sizes in schools, and cut the length of supervision for inmates released from prison.

The latest example of limits and conservation is the Balanced Budget Amendment, which is not only endorsed by the GOP and the Tea Party, but also has support of "Blue Dog" democrats as well. The austerity trend has spread beyond the GOP and the Tea Party and even the Democratic Party is beginning to take part in the austerity trend. Economists are already recognizing the implications of such an amendment, stating that the amendment would result in the loss of 15 million jobs, and that is before considering the effect of businesses and corporations imploding due to a cascade of debt defaults. This scenario fits with the forecast of the destruction of 36 million jobs during the course of Primary wave [3] down (2011 - 2016), pushing the unemployment rate (U6) up to 40% by 2016.

The austerity trend, which is now becoming more and more bi-partisan over time, is indicative of a bear market in progress, as people tend to focus on limits and conservation during bear markets. The latest attempt at a balanced budget amendment is expected to be scuttled (most likely in the Senate) as there is not enough bearish social mood for the amendment to pass. The most likely time frame for a balanced budget amendment to pass is 2017 after a massive wave of voter anger (larger than 1932) throws most of the liberal progressive politicians out of office in all levels of government in the 2016 election.

On the shorter term, one of the possible events in the political arena that could signal the peak of Minor wave 2 up is the "Super Congress" successfully reaching a deal in cutting the deficit. Such an event could generate a short-lived euphoria, much like the Greek deal in late October 2011 that resulted in banks taking a 50% haircut on Greek debt. Such a euphoria would be short lived as the bearish social mood associated with Minor wave 3 down would take over in very short order.

Preview of the 2017 Oil Supply Crash

Peak Oil is one of the issues that will play a substantial role in the economic and social conditions that will unfold in the years ahead. The worst of the oil supply crash will take place in the first year of the Bachmann Administration Period, but there are a number of precursor events that will no doubt unfold before the crash occurs. The oil supply crash will also play a major role in economic and living conditions on "Main Street" being comparable to the 1930s during the Bachmann Administration Period.

Some nations will feel the effects of Peak Oil sooner than others. A case of point here is the Keystone XL pipeline. Last week. the Obama Administration opted to kick the can down the road by delaying approval of the pipeline until 2013 or later after a massive outcry of protests from environmental groups. A few days later, Canadian oil companies shifted their focus to Asian markets after the project was delayed in the United States.
 
The United States consumes 19 million barrels of oil a day, far more than any other nation on the planet, with well over half the oil imported from oil producers. Canada is currently the largest supplier of oil to the United States, but the delay of the Keystone XL project will substantially change the picture.

With Canadian oil companies shifting their focus to Asian markets, an oil supply shortage will begin to develop in the United States with supply projected to decline by 3% a year for the remaining part of the Obama Administration Period, with oil supply (for the United States) projected to fall to around 17 million barrels a day in 2016. In 2017, the deflationary collapse of crude oil prices in the commodities market will result in Big Oil shutting down production of oil from tar sands, shale, and deep sea drilling, in order to protect their balance sheets -- which will cause a massive oil supply crash. It is well within the realm of possibility for the supply of oil to decline by 75% in 2017 as a result of the crash.

Peak Oil is just one of many issues that the western world will be dealing with during the worst part of "The Great Deflation". This is another contributing element of the larger "Crisis of the Western World" period associated with Grand Supercycle wave [IV].

In the aftermath of the oil supply crash, the economy is expected to become increasingly local as most motor vehicles are effectively taken off the road. Being able to buy and grow food local is going to be key to successfully surviving through the worst part of "The Great Deflation". Bartering is also expected to become widespread as well not only during the Bachmann Administration Period, but also through the "Green Technology Age" as well as people in "Main Street" struggle to adapt to the plutocratic environment during Supercycle wave (b) (2021 - 2042).

Prelude to 2012

While the economic fault lines appear to be stabilized (but very fragile), we are already seeing events that foreshadow what is yet to come when we approach the center of Minor wave 3 down in March / April 2012. There has already been a lot of comparisons between 2007-2008 and today as far as the stock market is concerned. The parallel is broader in scope than just the stock market as the same financial and economic implications are poised to play out in 2012 as they did in 2008.

On November 8, 2011, MF Global filed for bankruptcy. The corporation was run by ex-Goldman Sachs chairman Jon Corzine. The company went bankrupt after making bets on European sovereign debt. MF Global was the fifth largest financial-industry public company (with $41 billion in assets and $39.7 billion in debt) before filing for bankruptcy.

On November 9, 2011, Jefferson County, Alabama filed for bankruptcy. This is the largest municipal bankruptcy in US history at $4.1 billion. The bankruptcy resulted from a crumbling infrastructure, a budget shortfall, court rulings, a lagging economy, and public corruption. The debt burden also became too heavy for the county to carry as rising interest rates made the loan payments unaffordable.

The bankruptcy of MF Global and Jefferson County are just precursor events, with larger events poised to unfold as we approach the center of Minor wave 3 down. The bankruptcies are a parallel of the collapse of Bear Stearns in March 2008.

Here are two charts that compare the events of Primary wave [1] down (2007 - 2009) to Intermediate wave (1) of Primary wave [3] down.

Primary wave [1] down:

Minor wave 2 of Intermediate wave (1) of Primary wave [3] down:

The one thing to notice is that the bankruptcy of MF Global / Jefferson County occurred almost at the same position as the collapse of Bear Stearns did -- they both occurred about halfway through the second subwave within the larger downward impulse. Bear Stearns collapsed during Intermediate wave (2) of Primary wave [1] down. The bankruptcy of MF Global and Jefferson County occurred during Minor wave 2 of Intermediate wave (1).

The bankruptcy of MF Global and Jefferson County is a warning of what is yet to come as we approach the center of Minor wave 3 down. The "too big to fail" banks are in worse shape now than they were in 2008 as the banks did not get their credit ratings downgraded in 2008 but three of the "too big to fail" banks were downgraded by Moody's in late September 2011, along with UBS, Goldman Sachs, and JP Morgan Chase facing the threat of a credit downgrade. If the 2008 scenario continues to unfold, then the Obama Administration will be doing a lot of bailouts in March / April 2012 and TARP 2 will be launched to bail out the "too big to fail" banks. The center of Minor wave 3 down will also be characterized by the "Panic of 2012".

Mapping The Great Deflation

The worst of "The Great Deflation" is still in the future. In the long term, we are on track to continue downwards in "The Great Deflation" until the low point of Supercycle wave (a) is reached in 2021. Currently, there is still a great deal of exuberant optimism, made even more evident with Minor wave 2 up (within the much larger Primary wave [3] down that is unfolding from 2011 - 2016) still unfolding. A case of point in the continued exuberant optimism with an analyst recently calling for Dow 100,000 by 2030 on CNBC.

On the short to intermediate term, we are in the early part of Intermediate wave (1) down, which is projected to continue until September 2012 with a downside target of 5800 on the DJIA. The center of Intermediate wave (1) down should be reached in March / April 2012 and result in the "Panic of 2012", giving rise to limited bank runs in which up to 5% of the western world population try to get their money out the banks as fast as they can. Here is a chart showing the initial Intermediate degree decline from the peak in May 2011.

On the longer term, Primary wave [3] down is projected to end around March 2016 with a downside target of around 1500 on the DJIA. The "Slope of Hope" phase of "The Great Deflation" continues until the center of Primary wave [3] down is reached, which is around October 2013. The Cycle degree "point of recognition" will result in the "Great Panic of 2013" which will likely be followed by large scale bank runs throughout the western world. Here is a chart showing the projected wave path of Primary wave [3] down.

The third phase of "The Great Deflation" started in 2007 and will continue until 2021. The third phase is labelled as Cycle wave c and is currently unfolding as a five wave structure. The downside target for the end of "The Great Deflation" is 530 in the DJIA and 48 for the S&P 500. Here is a chart of Cycle wave c of Supercycle wave (a) down.

The Nasdaq is taking a different path, but is still affected by "The Great Deflation". The 2007 peak in the S&P 500 and the DJIA is not confirmed by the Nasdaq, which peaked in 2000. Supercycle wave (a) is unfolding as a complex fractal in the Nasdaq. Here is a chart showing the projected wave path of the index during the rest of "The Great Deflation".

The preferred scenario for the Nasdaq is that Supercycle wave (a) is unfolding as a double zigzag with the low point in 2024. The reasoning for the double zigzag comes from the tendency of waves A and C to be related to each other (equality or a 1.618 ratio is most common) in a zigzag. The tech bubble started at roughly 55 in 1974, and bubbles are always fully retraced. Since the first zigzag does not retrace the entire bubble, a second zigzag is needed to take the index below the start of the bubble. The Nasdaq 100 should be on a similar wave path.

There is also a deflationary collapse in progress for commodities as well, and oil is a great example. Here is a chart of crude oil showing the projected outlook from 2008 to 2024.

As with the Nasdaq, the preferred scenario is a double zigzag for Supercycle wave (a). The first zigzag, labelled as Cycle wave w, should correspond with Primary waves [1], [2], and [3] of Cycle wave c in the DJIA. Next would be Cycle wave x, which would correspond with Primary wave [4] up (2016 - 2019) in the DJIA. A second zigzag would then unfold, forming a bullish divergence with the DJIA in 2024 (the DJIA does not hit a new low in 2024).

The deflationary collapse in crude oil will result in an oil supply crash as OPEC and Big Oil shut down production of oil from tar sands, shale, and deep sea drilling in an effort to put a floor on a falling market and protect their balance sheets. The oil supply crash is coming in 2017.