On The Edge

This is an update to the previous post regarding the latest developments involving the rally off the June 4, 2012 low point. The rally is very close to completion with likely a few more trading days to go before Minute wave [iii] of Minor wave C down (May 2012 - June 2013) commences. The DJIA is back above 13,000 and the S&P 500 is nearing 1400. Exuberant optimism is one again evident with virtually everyone calling for new highs especially after the ECB President Mario Draghi vowed to do "whatever it takes" to support the euro currency last Thursday. In addition, virtually everyone in Wall Street is looking for the Federal Reserve to launch QE3 and the ECB to launch yet another round of quantitative easing in the very near future. The exuberant optimism and bullishness will not translate into new recovery highs as the bullish sentiment is very consistent with the character of a bearish wave 2 in a larger decline.

Here is an updated chart of Minute wave [ii] of Minor wave C down. The complex structure is very close to completion as the chart indicates:

The structure unfolded as a complex structure (zigzag - double zigzag - flat) with the last part of the flat (Subminuette wave c of Minuette wave (y)) in progress. Notice that the market is struggling to hold the upper light green channel line shown in the chart as support after reaching the trend line. On the longer term, the market continues its struggle to stay above the lower blue trend channel lines associated with Minor wave B up (Oct 2011 - May 2012) -- the trend lines continue to be important and a decisive failure to hold the lower blue trend lines shown in the chart as support would be very bearish as well.

The markets are on the edge of a massive waterfall decline that should start unfolding in early August 2012 with the center of Minor wave C down to be reached around September 19, 2012 and the end of Minute wave [iii] of Minor wave C down to be reached sometime in early October 2012.

Roadmap for 2012 and 2013

Markets are on the verge of a waterfall decline larger than the one that unfolded in August 2011 as Minor wave C down (May 2012 - June 2013) of Intermediate wave (W) down (Feb 2011 - June 2013) continues to unfold, completing an intermediate degree expanded flat.

All of the major indexes are clearly in the midst of a counter-trend bounce as evidenced by the choppy overlapping waves off the June 4, 2012 low. Here is a chart of the DJIA showing the advance from the June 4, 2012 low:

The rally off the June 4, 2012 low, identified as Minute wave [ii] of Minor wave C down, is nearing completion. The rally appears to be unfolding as a double zigzag with minuette degree sub-waves (w) and (x) complete and the second zigzag in the process of unfolding. With Minuette wave (y) = 0.618 times the length of Minuette wave (w) in the DJIA, an upside target of 13085 is projected based on the fibonacci relationship between the first and second zigzags within Minute wave [ii]. The rally is also losing momentum as the RSI and MACD are no longer confirming the move higher.

Minute wave [ii] of Minor wave C down is projected to reach completion in early August 2012. A massive waterfall decline, Minute wave [iii] down, will follow and last roughly 3 months. Here is a longer term chart of the DJIA, showing an updated road map for Intermediate wave (W) down (Feb 2011 - June 2013) of Primary wave [X] down (Feb 2011 - June 2016) within Cycle wave x up (2009 - 2021):

First the longer term perspective. Since Minor wave B up (Oct 2011 - May 2012) is almost 1.618 times the length of Minor wave A down (Feb 2011 - Oct 2011), then it is very likely that Minor wave C down (May 2012 - June 2013) will have 2.618 times the length of Minor wave A. This projects a downside target near 8500 for the end of Intermediate wave (W) down in the DJIA. Now we consider Minor wave C down in terms of its smaller sub-waves. Minute wave [i] down has 27% of the projected length of Minor wave C down with most of it retraced by Minute wave [ii] up. With 93% of the distance to the projected downside target of Minor wave C at the end of the second wave yet to be traversed, there is a strong case for Minute wave [iii] down to have 2.618 times the length of Minute wave [i] down, which projects a downside target of 9750 by October 2012.

Minute wave [iii] down should unfold during August, September, and October with the center of the downward impulse occurring around September 19, 2012. The "point of recognition" is important as evidence of the declining part of the business cycle should be abundantly clear by then, resulting in the Federal Reserve making a move to launch QE3 in an effort to prop up the economy and the stock market. After a multi-month sideways period, Minute wave [v] down should last 3 months with the center of the downward impulse occurring around May 20, 2013. The center of Minute wave [v] should be significant as well. Recall that Occupy Wall Street appeared in September 2011 as the fifth wave of the expanded flat (Minor wave A down)) unfolded. The center of Minute wave [v] down is expected to be associated with the advent of "Occupy Wall Street Phase 2" in which a much larger number of people take to the streets than before.

The same type of scenario also applies to broader markets as well, as the chart of the S&P 500 shows with the Intermediate degree expanded flat unfolding in the index:

The target for Minute wave [ii] of Minor wave C down in the S&P 500 is 1405. Minute wave [iii] down is expected to take the S&P 500 down to 1000 with the relationship Minute wave [iii] = 2.618 * Minute wave [i] expected to unfold. The downside target for Intermediate wave (W) down in the S&P 500 is 814, to be reached in June 2013.

The second half of 2012 and the first half of 2013 will go to the bears as the rest of Intermediate wave (W) down unfolds, after which the markets are projected to rally from June 2013 to June 2014. By the end of Intermediate wave (X) up, there should be a consensus that QE3 was successful in propping up the stock market. The upside targets for the end of Intermediate wave (X) is 1100 in the S&P 500 and 11700 in the DJIA. Intermediate wave (Y) will then follow, unfolding as a zigzag, completing Primary wave [X] down in June 2016 with a downside target of 5500 in the DJIA and around 550 in the S&P 500.

Update on the 2008 Parallel

This is an update to the earlier blog entry "Prelude to 2012" in which a forecast was made that the collapse of MF Global was the prelude to more seismic shocks that will come in 2012. History is indeed repeating itself even though the wave paths have turned out to be different.

Here is a chart of the S&P 500 from 2007 - 2009 with the events labeled:

Notice that the collapse of Bear Stearns took place early in what is now labeled Primary wave [C] down (Oct 2007 - Mar 2009) of Cycle wave w down (2000 - 2009). Six months later, the dam burst open in September and October 2008 with the collapse of Lehman Brothers and Washington Mutual, along with AIG, Freddie Mac and Freddie Mae, and the largest banks all getting a bailout, all as the "Panic of 2008" unfolded.

History is repeating itself again. In November 8, 2011, MF Global collapsed as the bear market rally off the October 4, 2011 low unfolded. The collapse of MF Global was seen as a parallel of the collapse of Bear Stearns. There are a number of recent events that strengthen the case that 2011 - 2016 is a parallel of 2007 - 2009:

1 -- Stockton, CA files for bankruptcy -- Stockton, CA became the largest US city to file for bankruptcy as soaring pensions and contractual obligations became too heavy of a financial burden for the city to carry. The city was unable to reach a deal with creditors to address a $26 million budget shortfall.

2 -- Scranton, PA is bankrupt for all practical purposes -- The city mayor reduced the wage for all city workers, including police and firefighters, to minimum wage as the city's cash reserves rapidly depleted. This move has sparked furor from a number of unions that are now vowing to sue in federal court including a motion to hold the mayor in contempt of court for violating a judge's orders to pay full wages.

3 -- San Bernardino, CA became the third large city in California to file for bankruptcy -- The city is facing a budget shortfall of $45.8 million, has already stopped paying some of its vendors, and is close to being unable to make payroll. The city benefited from the housing boom of the early 2000s, but since suffered as the housing bubble continues to deflate.

4 -- The LIBOR rate fixing scandal has rocked the financial world in the last several days -- At the center of the scandal is the British banking giant Barclays manipulating interest rates on trillions of dollars of credit derivatives. In the aftermath of the scandal, U.K. regulators have launched a criminal investigation into the rate manipulation behavior. A few days later, the scandal expanded in scope with a number of the largest banks including Bank of America, JP Morgan Chase, and Citigroup also involved. A number of cities and states in the US are now in the process of suing the banks over the economic impact of LIBOR manipulation. This is already being described as one of the biggest bank frauds in the history of modern civilization.

Here is an updated chart of the S&P 500 from 2011 - 2016 with all the important events labaled:

We are still in the early part of Primary wave [X] down (2011 - 2016) of Cycle wave x up (2009 - 2021), meaning that the "dam bursting open" event is yet to unfold in the future and it will be associated with a Primary-degree "point of recognition". The next set of shocks should come from Europe with the "Panic of 2012" unfolding later this year as the stock markets in Spain, Greece, and Italy reach the center of Intermediate wave (1) of Primary wave [3] down, which would correspond to the center of Minor wave C down of Intermediate wave (W) down (February 2011 - June 2013) in the DJIA, S&P 500 and the Wilshire 5000.

The dam should burst open in late 2014 after the popping of the education bubble in June 2014. Look for the Obama Administration to launch TARP 2 to bail out the banks in late 2014 -- especially plausible even now as the "too big to fail" banks were never downgraded in 2008 but have been hit with a series of downgrades since late last year, indicating that the banks are in worse shape now than they were in 2008. With the job market also collapsing during that time (10 million workers in the US lose their jobs between now and June 2016), college graduates won't be able to find employment after graduating from college. The issue is in crisis mode even now as over half of recent college graduates are unemployed. Student loan debt is already past the $1 trillion mark and continues to grow as the college bubble continues to inflate at an exponential clip. In 2014, with the next leg of the job market collapse well underway, look for the Obama Administration to do a student loan bailout to the tune of $1.7 trillion in late 2014. There are already a few people that recognize the possibility of a student loan bailout, such as the article on Bloomberg Businessweek.

The most powerful seismic shocks are yet to rock the financial world as the Primary degree decline (Primary wave [X] down) is still in the early stages. The largest shocks that will hit during the Primary degree decline in social mood should take place in late 2014.

Economic Slope of Hope

We are now seeing evidence of the declining portion of the business cycle unfolding even in the United States with weakening manufacturing and the job market continuing to display signs of exhaustion. Even as the economic indicators (even the official ones published by the BLS) show signs of deterioration, economists and analysts remain stubbornly bullish -- in both 2010 and 2011, when the economic indicators showed signs of declining momentum, the fear of a double dip came up, but there is no fear of a double dip this time around -- just more bullishness. The economy is sliding down the slope of hope, both in the United States, and the rest of the western world.

A number of developments have come into play, solidifying the case for an economic slope of hope:

1 -- In June 2012, manufacturing in the United States as indicated by the ISM index entered into contraction territory with a reading of 49.7. The index stayed above 50 during all of 2010 and 2011. This is a very strong indication that the declining phase of the business cycle is in force. Considering that the ISM in the rest of the Western World has stayed below 50 for an extended amount of time, it is very likely that manufacturing will continue to contract in the months and years ahead. Economists reacted to the numbers by taking a bullish position with the belief that the Federal Reserve will step in with QE3 to keep the economy propped up.

2 -- The job market continues to show signs of exhaustion with just 80,000 jobs created in June 2012 after creating 69,000 jobs in May 2012. Even with a weak jobs picture, economists are still making very large extrapolation leaps such as the prediction by the Department of Labor for careers such as health care to expand by 18% to 30% from 2010 to 2020. Also making a large trend extrapolation leap is Georgetown University's Center on Eduction and Workforce, which is predicting that the health care industry will create 5.6 million jobs by 2020. The fact that people are making large extrapolation leaps in the job market with predictions for more job market growth is very indicative that a reversal is just around the corner. In spite of extreme bullishness on the outlook of the job market by economists and analysts, there is a lot of weakness underneath the surface:

2a -- Full time jobs have been getting harder to find. This strongly supports the supposition that the job creation trend in the United States has been primarily due to the destruction of family wage and living wage jobs with part time minimum wage jobs created in their place.

2b -- Job openings are on the decline as businesses and corporations once again focus more on limits and preservation (bear market trait), rather than progress and production (bull market trait).

2c -- Large scale job layoffs are making a comeback with Best Buy laying off 2400 workers and Nokia laying off 10,000 workers. This is just the start of what should be a very persistent trend of large scale layoffs that will continue until June 2016 and result in 10 million (or more) people losing their jobs as Primary wave [X] down (Feb 2011 - June 2016) of Cycle wave x up (2009 - 2021) unfolds.

3 -- Economists are already fishing for a bottom in the United States economy with many analysts extremely bullish on the housing market and optimistic that the Federal Reserve will step in with QE3 on any hints of further weakness.


The stock markets are also indicating that the declining phase of the business cycle has arrived. The orthodox high points are already in for all of the major market indexes, including the DJIA. The "final thrust" that started to unfold from the June 4, 2012 low has morphed into a double zigzag, which means that Minor wave C down of Intermediate wave (W) down of Primary wave [X] down (2011 - 2016) has arrived.

Here is an updated intermediate term chart of the DJIA:

Minor wave B up in the DJIA unfolded as a triple zigzag and as a bearish rising wedge. The downside target for Minor wave C down is roughly 8500 to be reached in June 2013.

Here is an updated intermediate term chart of the S&P 500:

Minor wave B up in the S&P 500 (and the Wilshire 5000) unfolded as a double zigzag and peaked sooner than the DJIA. The downside target for Minor wave C down in the S&P 500 is roughly 850 to be reached in June 2013.

Minor wave C down has begun in all of the major indexes with Minute wave [i] down completed in early June 2012 and Minute wave [ii] up in progress. The stock market is expected to remain elevated in a trading range (12200 - 13200 for the DJIA, 1200 - 1380 for the S&P 500) before heading lower in earnest later this year with Minute wave [iii] down unfolding as a massive waterfall decline.

The declining phase of the business cycle is unfolding, but economists and analysts are expected to remain stubbornly bullish even as the economy, the stock market, and the job market resume their larger downtrend. The business cycle low point will be reached around June 2016 with a downside target of 5500 for the DJIA and around 550 for the S&P 500.