Thursday, May 31, 2012

Exuberant Optimism Takes Center Stage

Even as the markets struggle to muster a rally off the short term lows of May 23, 2012, optimism continues to rise to new heights. The DJIA narrowly held above the May 23, 2012 low point today at the session lows before moving off the lows.

Here is an updated chart of the DJIA. In the short term, the short term decline lasted longer than expected, but the larger picture has not changed -- the rally off the October 2011 low is a triple zigzag in the making with the final z wave in play, part of a larger expanded flat, Intermediate wave (W) of Primary wave [X] (2011 - 2016) down.

The markets are at a crucial juncture. All the major markets -- the DJIA, the S&P 500, the FTSE, and the DAX, are all testing the lower trend channel line. The DJIA and the S&P 500 have already touched that line three times since May 23, 2012, so the trend line is considered important. Any decisive break below the lower trend line (shown as the lowest blue line on the chart) is bearish and a very strong indication of a trend change -- that is, Minor wave C down of the larger expanded flat, Intermediate wave (W) is in progress.

Even as the markets struggle to hold the lower trend channel line as support, optimism continues to rise into the stratosphere in the mainstream media.

1 -- We continue to see calls for more recovery in the housing market as people in the mainstream media continue fishing for a bottom. A number of people went on CNBC in the last few days, including Robert Schiller, S&P's David Blitzer, and Carl Case, all calling a bottom and a recovery. All three cite the local housing markets in Las Vegas (construction) and Phoenix (home prices) as evidence that the housing market is at a bottom with a recovery on the horizon.  There is no recovery in the housing market, only a dead cat bounce that will soon give way to new post-bubble lows. The housing market is sliding down the "slope of hope" and the bottom is very far down.

2 -- As testimony to the exuberant optimism that is pervasive in society, there is now talk of a "second industrial revolution" from advanced manufacturing. It is way too soon to talk about a coming "industrial revolution". No "industrial revolution" will start until "The Great Deflation" is completed. The next "revolution" will be the "Green Technology Revolution", which will unfold during Supercycle wave (b) up, and span from 2042 to 2076. Calls for a "second industrial revolution" by people in the mainstream media are based on linear extrapolation of a trend that started in 1932, and it has become intuitive for people to take the long term trend and extend it into the future -- in other words, predicting the present.

3 -- Another instance of exuberant optimism is projections of a high tech worker shortage -- a very strong indication that exuberant optimism has taken hold in the job market. It's one thing to call for more job creation, it's another matter altogether to call for job creation to unfold at a fast enough clip that businesses can't find workers to fill all the job positions. The job creation trend has unfolded long enough (since January 2011) that it has become intuitive for people to take the trend and extrapolate the trend into the future, and we are now at a point where people are making large extrapolation leaps, which is a sign that a large degree trend reversal is imminent. Considering that we are very close to a business cycle high point, job creation will come to an end and the economy is very likely to wipe out 10 million (or more) jobs in the United States between now and June 2016, the next business cycle low point. The job market, like the housing market, is sliding down the slope of hope.  There is no high tech worker shortage -- the technological revolution started in 1932 with the advent of Supercycle wave (V) of Grand Supercycle wave [III] -- and ended in 2000 with the bursting of the tech bubble in 2000. There was no talk of a tech worker shortage until the late 1990s, when the tech bubble was in its late stages and ready to pop. The high tech worker shortage hoax has been circulated by colleges since the late 1990s as the higher education bubble started to pick up momentum and has taken center stage now as the higher education bubble appears ready to burst if it has not already done so.

As we approach the business cycle high point next month, exuberant optimism has taken center stage as the mainstream media, analysts, and economists have all become bullish. There is every reason to believe that a large degree reversal is imminent with a five wave decline set to start in June 2012 and last for around a year.

Thursday, May 24, 2012

The Fall of Facebook

Facebook has reached the top of the mountain and is now on the other side of the mountain. The IPO was hyped into the stratosphere before debuting on May 20, 2012. The company's stock opened at $38 a share, whipsawed throughout the day before ending the first day up just 0.6%. In the days following the unveiling of the IPO, Facebook has seen its stock plunge in a waterfall decline and is now at $33 a share. It's too early to come up with a wave count for Facebook's stock, but being part of the Nasdaq and being part of the social media bubble that has either popped or will do so soon, the Nasdaq can be used as a reasonably good proxy for where Facebook will be heading down the road in the months and years ahead.

Facebook's mountain top experience was evident back in early February 2012 as rumors about an IPO began to circulate throughout the financial world. Facebook's population had reached 700 million at that time and has allegedly reached 900 million today. There was an insane amount of anticipation for the IPO back then as exuberant optimism went into overdrive. Several days ago, as the IPO was about to debut, it had become evident that Facebook was at the top of the mountain, yet the other side of the mountain was clearly visible. With Facebook changing its policies and terms of use on a frequent basis, the seeds of destruction have already been sown, evidenced by an AP-CNBC poll showing that 59% of Facebook users do not trust Facebook to keep their personal information private. With social mood poised to go south for several years, mistrust can easily turn into a scenario where people rush for the exits by the tens of millions as they pull the plug on their Facebook accounts out of anger and self preservation of their privacy, especially as we approach the year 2015, when Intermediate wave (Y) (the sharp zigzag down) of Primary wave [X] (2011 - 2016) down is in progress.

The Nasdaq is a reasonably good proxy for where Facebook is heading in the future as all the social media companies are part of the index. Here is an intermediate term chart of the Nasdaq with the Facebook IPO arrowed on the chart:

As the chart shows, the Nasdaq is already on the way down again, completing Primary wave [B] (2002 - 2012) of the zigzag Cycle wave w (2000 - 2016) with Primary wave [C] (2012 - 2016) now in progress. The Facebook IPO was unveiled during Minuette wave (iv) of Minute wave [iii] of Minor wave 1 down from the March 2012 peak in the Nasdaq. The future wave path of the Nasdaq also supports the idea of Facebook having peaked a few days ago with a long term decline on the horizon.

We are indeed seeing the beginning of the end of Facebook. In the immediate aftermath of the IPO, Facebook has run into hard times on many fronts:

1 -- Shareholders are now suing Facebook and its banking partners as a trading firm revealed massive losses on its shares and are seeking remedies. The sudden change in sentiment from hype to anger is a strong indication that social mood is going south on a large scale.

2 -- The Feds are probing a deal over Wall Street investment banks warning its top clients about Facebook's future financial prospects in the days leading up to the IPO as well as revelations involving Facebook's underwriters gave favored clients an unfair advantage over other investors. This is the first time that the Feds have gotten involved in an IPO debacle. Other social media companies, such as Pandora, had unveiled their IPOs and seen their stocks decline without drawing attention from the government. The involvement of the Feds also signals a major trend change in social mood.

3 -- The chairman of the Senate Banking Committee, Sen. Tim Johnson (D-SD), has indicated that his panel is looking into the Facebook IPO. The banking committee seeks briefings with Facebook's representatives, regulatory agencies, and possibly the banking underwriters, with the possibility of a hearing taking place in the short term future.

4 -- Facebook's top executives are exploiting loopholes to avoid paying taxes to the US government, as well as Facebook issuing stock options to avoid corporate taxes. This move was immediately denounced by Sen. Carl Levin (D-MI), highlighting the destructive effects of the exploits on the taxpayers and on US tax revenue.

5 -- Citadel Investment Group took massive losses from Facebook trades on the behalf of clients, again underscoring the hype surrounding the IPO which did not materialize into gains for investors.

In spite of the massive decline in Facebook's stock following the IPO debut, as well as the hard times that have now started to come to the company, analysts and economists are still stubbornly optimistic on the prospects of Facebook's stock going higher in the future. Setting the scene is analyst Laura Martin of Needham & Co, who went on CNBC comparing the idea of shorting Facebook stock to "getting in front of a freight train" and issued a "buy" rating for Facebook stock.

Facebook's hard times are just beginning. We are seeing the initial series of shocks now. As social mood goes south in the months and years to come, Facebook's decline will continue unabated, eventually resulting in tens of millions of people rushing for the exits as mistrust morphs into anger and self preservation in the area of protecting their privacy and personal information. Facebook is expected to be much smaller in 2016 than it is now with a population decline of 50% of more from today's levels.

Thursday, May 17, 2012

The Final Thrust

We are on the verge of embarking on the final thrust and put in the final high for 2012 before the markets head lower in earnest in the second half of the year and beyond. Many markets in the Western World (with the exception of France) have been tracing out a complex structure from the October 2011 low. We are approaching the business cycle high point, on course to be reached on June 24, 2012.

Here is an updated intermediate term chart of the DJIA:

The 3 month triangle, Minute wave [x] of Minor wave B, is complete with Minute wave [z] poised to start. Notice that the DJIA found support on the middle blue trend line, which is the inner trend channel line associated with Minor wave B. The triple zigzag should be completed on June 24, 2012 with an upside target of 13625.

Here is a chart showing the 3 month triangle in the context of the larger term picture in the DJIA:

The advance from the October 2011 low is Minor wave B of a larger expanded flat, Intermediate wave (W). At the upside target of 13625, Minor wave B will be 1.618 times the length of Minor wave A. After the final thrust is completed, then Minor wave C of Intermediate wave (W) will unfold and last for around a year with a downside target of 8500 on June 2013.

Many other markets in the Western World are also tracing the same pattern in which Primary wave [W] of Cycle wave x ended in February 2011 with Primary wave [X] now in progress and on course to continue until June 2016.

Here is an updated chart of the DAX:

Unlike other markets, Minor wave B in the DAX traced a simple zigzag and retraced just enough of Minor wave A for Intermediate wave (W) to be a regular flat. Minor wave C of the larger flat is in progress now. The DAX should put in a Minute wave [ii] bounce while the final thrust unfolds in the DJIA before heading lower in a larger third wave sell-off. The downside target for the DAX at the end of Intermediate wave (W) is 3625 to be reached in June 2013.

Here is an updated chart of the FTSE, which is following the wave path of the DJIA quite closely:

As with the DJIA, the FTSE is also tracing a triple zigzag from the October 2011 low. The FTSE is yet to fulfill the requirements for a flat. The minimum upside target for Minor wave B is 5966, the level in which Minor wave B retraces 90% of Minor wave A. Notice that the FTSE found support at the bottom blue trend line, which is part of the outer trend channel associated with Minor wave B. A final thrust should propel the FTSE to at least 5966 to complete the triple zigzag. A five wave decline, Minor wave C, is in the forecast once the final thrust is completed. The downside target for Minor wave C is around 4100, the price level that would make Minor wave C 1.618 times the length of Minor wave A.

There is already a lot of extreme optimism and bullishness. As I suggested in the previous blog entry, economists and analysts will be making large extrapolation leaps for both the stock market and the economy:

1 -- An analyst from BNP Paribas Fortis is forecasting that the DJIA will hit 100,000 (!) within the next 10 years. The analyst is basing the forecast on central banks pumping enormous amounts of money into the markets.

2 -- Federal Reserve worship has reached unprecedented levels with most analysts believing that the Federal Reserve can keep the markets propped up indefinitely.

3 -- Some analysts are even seeing the economic cataclysm in Greece as bullish for the United States economy under the rationale that the economic cataclysm will lead to investors seeking a safe haven in US treasury securities.

4 --  All eyes are on the Facebook IPO, soon to be unveiled. There is almost universal optimism that the IPO will be bullish for the economy and the job market. Facebook's mountain top experience is nearing an end, as suggested in an earlier blog entry. The other side of the mountain is already visible with a long term decline in the future. The seeds of the decline have already been sown as 59% of Facebook users do not trust Facebook to keep their information private. A big social mood decline associated with Primary wave [X] (2011 - 2016) down can easily turn public mistrust into a scenario where people pull the plug on their Facebook accounts by the tens of millions.

In spite of a pervasive atmosphere of exuberant optimism, we are already seeing hints of the next stage of the Crisis of the Western World:

1 -- There is evidence of a bank run in progress in Greece as $894 million were withdrawn from banks in the country in one day. This could easily be a precursor to bank runs in Spain, Portugal, Ireland, and Italy within the next 12 to 36 months as the debt crisis in Europe continues to spread.

2 -- Hollande has been sworn in as the new president of France after an election on May 6, 2012 in which Sarkozy was thrown out of office by angry voters. In spite of talks between Hollande and Merkel in the aftermath of the election aimed at keeping the EU together, Hollande ran on a platform of spending to stimulate economic growth. With social mood poised to go south in the coming months and years, there will be strife and discord between Hollande and Merkel, much like the strife and discord that has been unfolding between President Obama and House Speaker Boehner, and the result will be the same -- large scale political gridlock -- effectively shutting down any attempt to fight the economic cataclysm that is unfolding.

3 -- The United States is dealing with its own version of the PIIGS -- namely Illinios, California, Texas, New Jersey, and Florida. California's budget deficit problems have been making the news again with the deficit expanding to $16 billion with even more budget cuts on the horizon. Keep in mind that California is over three times the size of Greece, so the implications of California going under will certainly result in a deflationary vortex that will drag down the rest of the United States within a matter of months, if not weeks.

The second half of 2012 will go to the bears. Once the final thrust is completed on June 2012, the markets will head lower in earnest for the rest of the year and continuing to decline until the next business cycle low point is reached in June 2016.

Wednesday, May 9, 2012

A Time of Consolidation

The stock market has been in a three month consolidation period that is nearing completion. After the consolidation period is complete, a final push to new bear market rally highs is expected before peaking for the year on June 24, 2012 as the business cycle high point is reached.

Here is a chart of the DJIA:

The DJIA has been tracing out a 3 month expanding triangle, which is identified here as the second x wave of a larger triple zigzag, Minor wave B. Wave B is the complex leg, unfolding as a triple zigzag. Waves A, B, C, and D are complete with wave E of the triangle close to completion. The triangle should be completed on May 15, 2012 with a downside target of 12680. The triangle will be followed by a powerful thrust upwards in three waves that will take the DJIA to the upside target of 13625 by June 24, 2012.

Wave E of the triangle is unfolding as a simple zigzag. The E leg of the triangle contains a smaller triangle as can be seen on a close-up view of the DJIA:

The triangle, Subminuette wave b of Minuette wave (e), has a duration of around 3 days and should be completed late tomorrow (May 10, 2012, around 2 PM New York time). The smaller triangle is also unfolding in the S&P 500 and the Wilshire 5000. The D leg is likely the complex leg (double zigzag) of the smaller triangle.

The triangle count for Minute wave [x] (the second x wave in a triple zigzag) only applies for the DJIA. In the S&P 500 and the Wilshire 5000, Minute wave [x] is unfolding as a double three (expanded flat - triple zigzag -- flat) pattern that will also end in May 15, 2012.

The chart for the S&P 500 illustrates the double three count:

The downside target for the S&P 500 is 1336, reflecting the relationship Subminuette wave c = 1.382 * Subminuette wave a within Minuette wave (y). After the downside target is reached, a powerful thrust to 1452 is expected to follow with the upside target reached on June 24, 2012.

A time of consolidation is in progress with one final push to new bear market rally highs to start on May 15, 2012. Exuberant optimism should go into the stratosphere during the final thrust with the possibility of record bullishness in the picture. The record bullishness could easily take the form of people making very large extrapolation leaps, such as calls for Dow 30,000+ and a lot of talk about the "American Miracle" in the economy from economists and people in the mainstream media.