Sunday, September 9, 2012

Journey to the (Primary Degree) Peak

There are now a number of compelling signs that a Primary degree top has already put in or will be registered in the very near future. Both the internal market indicators and the social mood indicators are suggesting that a peak has already happened or will shortly. The S&P 500 and the Wilshire 5000 reached new 2012 highs, exceeding the April / May 2012 highs. The DJIA has yet to confirm the S&P 500 and the Wilshire 5000 higher, but given the tendency for the three indexes to have "similar wave paths", it is quite likely that the DJIA will confirm the other two indexes higher.

The longer term outlook for the 2009 - 2021 period is still intact, with Supercycle wave (a) (2000 - 2042) down unfolding as a complex W - X - Y structure and Cycle wave x (2009 - 2021) up in progress.

The most likely wave count for the S&P 500, Wilshire 5000, and most likely the DJIA as well, is a 3 year zigzag with an ending diagonal for Intermediate wave (C), as the previous main count was invalidated with a new 2012 high in the S&P 500 and the Wilshire 5000. Here is a chart showing the revised wave count in the context of the larger Cycle wave x structure in the S&P 500:

The revised wave count still works within the larger Cycle degree structure, with Primary wave [W] up (nearing its end) lasting 3 years, which would then be followed by Primary wave [X] down from 2012 to 2016, lasting 4 years, then Primary wave [Y] up from 2016 to 2021, lasting 5 years. Cycle wave x would then be a complex (zigzag - double zigzag - expanded flat) structure. 4 years is enough time for the DJIA to fall from 13300 to 5500 and for the S&P 500 to fall from 1430+ to 550, and each of the Primary degree sub-waves that compose Cycle wave x are reasonably comparable to each other in price movement and duration, as well as Cycle wave x (2009 - 2021) being reasonably comparable to Cycle wave w (2000 - 2009) in duration.

However, the previous main count is still working very well for the NYSE Composite as well as the DAX and the FTSE 100. Along side the Wilshire 5000, the NYSE Composite is a market index composed of a large cross-section of corporations and businesses and thus is a broad measure of social mood. The NYSE Composite is in a bearish intra-market divergence with the Wilshire 5000 and the S&P 500, indicating a fractured market.

Here is a chart of the NYSE Composite from 2005 to 2021:

Upside momentum is clearly on the decline, not only with bearish intra-market divergences taking place (the 2012 high in the S&P 500 and the Wilshire 5000 is not confirmed by the NYSE Composite, the Transports, the DAX, the CAC-40, or the FTSE 100), but the rally is being carried by fewer stocks. A substantial part of the recent rally in the S&P 500, the Nasdaq, and the Nasdaq 100 can be attributed to the "Apple Bubble" as well as a social media bubble that is now bursting with the decline of Facebook in progress.

There are also a number of social mood indicators that are signalling a significant top in the markets:

1 -- The first "Magazine Cover Indicator" event took place with "Dow 15000" appearing on the February 13, 2012 cover of Barron's magazine. With the rally from the March 2009 lows losing much of its momentum and with bullish sentiment already in the stratosphere, this event is a significant sell signal for the markets.

2 -- In early August 2012, Mitt Romney called for more bull market in the economy and the job market. This is another very strong peaking signal as politicians are always the last people to act on a trend, and for that matter, the last people to extrapolate a trend. This event is in the same league as the Federal Reserve Chairman saying that "rates will remain low through 2014".

3 -- The second "Magazine Cover Indicator" event took place with the bull market portrayed as unstoppable and invincible on the September 3, 2012 cover of Barron's magazine. Now that everyone is convinced that the "bull market" is unstoppable, the uptrend in the markets from the March 2009 lows is fully played out and ripe for a reversal.

4 -- Just three days later, on September 6, 2012, Vice President Joe Biden declared that "America has turned the corner" on the job market and the economy, saying that "America's best days are ahead of us". This is yet another instance of politicians extrapolating a trend and "predicting the present". Unlike Mitt Romney, Joe Biden has virtually no business experience, so this event is even more significant. The job creation trend has played out for a long enough time that it has become intuitive even for politicians to extrapolate the trend.  America's best days are indeed ahead of us, but those days won't come until the Grand Supercycle degree bear market that started unfolding in 2000, and the associated major depression in the economy, is completed.

The journey to the top of the (Primary degree) peak in the markets have been marked by extreme bullishness, as well as magazine cover indicator events and politicians calling for more bull market in the economy and job market, thereby extrapolating a trend by "predicting the present". These events, along with bearish intra-market divergences and declining momentum, all point to a major reversal ahead.

1 comment:

  1. Hi AV, what is your view on the S&P at this moment? I look forward to your next update, when do you think you will post another update.