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.

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