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.

The Rise of Paul Ryan

This is an update to an earlier post, "Update on the Road to Plutocracy", in which the forecast for a full blown plutocracy in the United States is slowly being fulfilled as the stage continues to be set behind the scenes. In August 11, 2012, Mitt Romney selected Paul Ryan as his running mate. The significance of the event, as with so many cases, is not fully recognized by most people. The key to the larger picture is that Paul Ryan is a member of the American Legislative Exchange Council (ALEC) and is closely connected with the Koch Brothers (and Koch Industries).

Paul Ryan's connection with Koch Industries and ALEC is very significant, as the Koch-ALEC cabal is identified as the engine that will drive the future plutocracy in the United States starting in 2042. This also does not conflict with the idea of a Bachmann Administration Period, which is forecast to span from 2017 to 2024. While Michele Bachmann has not been confirmed to be a member of ALEC, her platform is virtually identical to Paul Ryan's as far as economic policy is concerned. This brings about the possibility of Ryan / Bachmann or Bachmann / Ryan for the 2016 presidential election in which bearish social mood is guaranteed to result in the Democratic Party taking massive losses during the 2016 elections to a comparable (if not even larger) degree to the losses that the GOP sustained in the 2008 election and either Michele Bachmann or Paul Ryan as the next president of the United States.

The forecast for a plutocracy is based on the characteristic of a B wave within a larger bear market of Supercycle degree and above, in which B waves are technically weak with weak fundamentals. Just as fifth waves are weaker than third waves by every measure, B waves are weaker than fifth waves by every measure. A full blown plutocracy is consistent with the expected character of Supercycle wave (b) up (2042 - 2076) of Grand Supercycle wave [IV] (2000 - 2118), including the fact that only a small cross section of the populace will take part in the return to prosperity in the United States after "The Great Deflation" ends in 2042.

We continue to see evidence of a coming plutocracy in the United States, as new developments illustrate:

1 -- The middle class continues to decline with most people in that group substantially worse off than they were a decade ago.

2 -  The destruction of living wage jobs and family wage jobs continues unabated, with the last of the family wage jobs projected to be gone by 2015 and the last of the living wage jobs projected to be gone by 2020.

3 -- In spite of the phony "recovery" in the job market, corporations and businesses are not really putting in much effort in hiring more workers. This is consistent with the expectation of increasing conservatism due to a bearish social mood that is unfolding.

4 -- Poverty continues to proliferate, with the official poverty rate reaching the highest point since the 1960s. The actual poverty rate in the United States is likely around 35% to 40%. Expect the poverty rate to reach much higher levels by the time the plutocracy arrives in 2042.

5 -- As of 2011, 40% of households in the United States were living paycheck to paycheck. At the start of the Grand Supercycle degree bear market, the figure was 31%. There is no doubt that the bear market continues to have an effect on the economy, akin to a house that is prettied up with new paint on the outside even as the foundation of the house continues to rot.

The rise of Paul Ryan in the political arena is another indication of the coming plutocracy, In 2016, bearish social mood associated with Primary wave [X] down 2011/2012 - 2016) within Cycle wave x up (2009 - 2021) will make conditions ripe for Paul Ryan to ascend to the White House in 2017 either as VP or President.

Inclusionism Breaks New Ground

As a testimony of social mood remaining at historically bullish levels in spite of 12 years of bear market (so far), we witnessed inclusionism (characteristic of bullish social mood) break new ground with Russia joining the World Trade Organization (WTO) after 18 years of negotiations.  The significance of the event won't be recognized by most people, but it is a very significant event from a socionomic perspective. This type of event, along with Mitt Romney calling for more bull market in the economy and job market (see this post), could easily be a peaking signal with a large degree reversal just around the corner.

When inclusionism breaks ground in previously unreachable areas, it is a very strong peaking signal. The last event of this type was Bulgaria and Romania joining the European Union in 2007 just before Primary wave [B] of Cycle wave w down (2000 - 2009) ended in October 2007. It is also notable that there was a frenzied eastward expansion of the European Union from 2004 to 2007 with 10 nations added to the union during the period.

Even though there has been a lot of speculation amongst the (euro) bears that the European Union will break up in the future, there is a strong case to be made that the expansion of the EU could continue all the way into 2021, the peak of Cycle wave x (2009 - 2021) up, with the break up (due to nations leaving the EU) to take place during Cycle wave y (2021 - 2042) of Supercycle wave (a) (2000 - 2042) down. The last part of Cycle wave x up (likely to be Primary wave [Y] up (2016 - 2021)) could feature a last frenzied expansion of the European Union before "The Great Deflation" unfolds in full force in 2021. Indeed, the stage is already being set for a last period of frenzied expansion starting with Croatia set to join the European Union in July 2013 and several other nations recognized as potential candidates to join the EU in the future.

The addition of Russia into the WTO is occurring as Primary wave [W] up is nearing a peak (current wave count was invalidated in the S&P 500, but still valid for the DJIA and Wilshire 5000. New charts coming in the very near future), with Primary wave [X] down to shortly follow the peak.

The European Union is expected to come under a lot of stress during Primary wave [X] (~2012 to 2016) down of Cycle wave x (2009 - 2021) up with perhaps a lot of speculation that Greece, Spain, Italy, or Portugal leaving the European Union during that time. When Primary wave [Y] (2016 - 2021) up of Cycle wave x (2009 - 2021) up starts, the European Union is expected to go on a frenzied expansion with inclusionism reaching levels regarded as unreachable today. There are five nations that are even now recognized as candidates for inclusion into the European Union -- Iceland, Macedonia, Montenegro, Serbia, and Turkey. In addition, Albania is in the process of applying for membership into the EU. From the socionomic perspecive, the most likely scenario is for Iceland, Macedonia, Montenegro, Serbia, Turkey, and Albania to gain membership in the European Union during the 2019 - 2021 time frame as the last part of the Cycle degree advance in social mood unfolds.

The Euro, the currency of the European Union, is expected to be a fully functioning currency during the rest of the "extend and pretend" phase (the second phase of "The Great Deflation"), with the fate of the currency expected to face very tough challenges during the third phase of "The Great Deflation" during the 2021 - 2042 time frame.

Update on the Apple Bubble

This is an update on the February 2012 blog entry on the Apple bubble, in which a case was made for Apple being a parallel of the South Sea Company. The Apple bubble is still in progress in spite of a decline that unfolded earlier this year. Investors are still very bullish on Apple as illustrated by a number of articles such as this one that is calling for more upside in Apple's stock price.

There was a very strong reason to not call a long term top on Apple even though the rally appeared to have played out. Here is an intermediate term chart of Apple to illustrate the point:

Apple's high for the year occurred in April 2012 before the decline started to unfold. The decline, now identified as Minute wave [iv], unfolded as a zigzag and reaching its low point in late May 2012 before resuming higher. There is already some recognition that Apple is a bubble, yet many people have attempted to call a long term top in Apple's stock, saying that the bubble has popped (the top calling has been unfolding since 2008!):

1 -- Yahoo news -- Apple bubble already starting to burst (August 18, 2008).

2 -- Seeking Alpha -- The Apple Bubble is ready to burst  (November 29, 2011).

3 -- Forbes -- Five signs that Apple is a bubble (April 23, 2012).

Bubbles always end in a bust, but they also seem to last longer than many people think possible. After the decline earlier this year, the stock is on the rise again. However, it is quite obvious that the rally lacks the impulsiveness of earlier rallies that propelled the company's stock to $600 a share earlier this year. The rally from the late May 2012 low appears to be unfolding as an expanding ending diagonal with the last part of the rally in progress. The target for the rally is $664 a share to be hit within the next few weeks before a sharp sell-off commences with the advent of Intermediate wave (4) down.

Here is a longer term chart of Apple, showing how the rest of the Apple bubble may play out:

The blue box shown on the chart is the price territory of the fourth wave of one lesser degree, which would be around $300 to $375 a share. This follows a guideline that fourth waves go into the price territory of the fourth wave of one lesser degree. A sideways pattern for the coming Intermediate wave (4) down is in the forecast, most likely a flat, which should take around a year to play out.

As Intermediate wave (4) down climaxes in around June 2013, Apple could either come out with (or announce the unveiling of) an entirely new innovative product or make a move to acquire a large social media company. Either one could be seen as a massive game changer and give investors a reason to go on a bullish frenzy with the mainstream media along for the final ride up. The final stage of the Apple bubble will unfold during Intermediate wave (5) up, unfolding as an epic blow-off top that takes the company's stock as high as $875 to $1000 a share by June 2014. As a precursor to the coming blow-off top, there are already at least 216 hedge funds that have Apple in their portfolios, which is indicating a very high level of bullishness on Apple stock.

This chart shows the final Primary degree advance in Apple stock:

The final Primary degree advance will have lasted 5 years, from 2009 to 2014. Notice that Intermediate wave (2) down in April 2010 was very brief and very sharp, while Intermediate wave (4) down, as a guideline of alternation, is likely to have a much longer duration and unfold as a flat (a sideways pattern).

The bursting of the Apple bubble will have widespread implications as the stock is a component of both the S&P 500 and the Nasdaq. The aftermath of the bursting of the Apple bubble is expected to result in a massive decline in the stock market in general from 2014 to 2016 with the longer term aftermath persisting for years if not decades. The effects of the Apple bubble bursting will first be felt in the technological sector with many tech jobs being purged off the map in the 2014 - 2016 time frame, which will then have a ripple effect on other areas of the economy and job market.

Trend Extrapolation in Politics

On Saturday, August 4, 2012, an event that is considered very significant from a socionomic perspective has taken place. Most people will not recognize the significance of the event as it will be seen as just one more day of speeches by politicians made in an effort to influence the November 2012 election.

One day after the jobs report was released for July 2012, Mitt Romney made a bullish comment on the job market, saying that "America is poised to take off economically". This event is in the same league as the Federal Reserve Chairman saying that "rates will remain low until 2014.". What we saw is politicians extrapolating a trend that has been unfolding for over 2 years. Politicians are always the last people to act on a trend, and for that matter, the last people to extrapolate a trend. When a trend becomes so obvious that it becomes intuitive even for politicians to extrapolate the trend, the trend has run its course -- in other words, it is a peaking signal at tops.

Here is a long term chart of the S&P 500, with the event labelled on the chart:

Notice when Mitt Romney made the statement about "America being poised to take off economically" -- it is very significant that the statement was made just as Minute wave [ii] up is about to wrap up to a close within the next few trading days, with Minute wave [iii] down of Minor wave C down (April / May 2012 - June 2013) to follow shortly afterwards. The event will indeed turn out to be a significant peaking signal from a socionomic perspective.

The rally also appears to be corrective with a lot of overlapping waves and appears to be forming a bear flag.

Here is a close up of Minute wave [ii] of Minor wave C down in the DJIA:

The chart illustrates how close we are to the end of the rally that started in June 4, 2012. The structure, of course, is a complex (zigzag - double zigzag - flat) structure. The last part of the structure is just about completed with a few more small sub-waves yet to unfold. The waterfall decline to follow should start some time this week.

There is much to be said about Mitt Romney extrapolating a trend that has been in play for over 2 years -- namely extrapolating the trend in the job market. There is a very strong tendency for people to "predict the present" and extrapolate the present into the future when the trend has played out for a sufficiently long time. This event is a peaking signal for the job creation trend as well, with the larger trend of job destruction soon to regain dominance in the job market within the next few months (definitely by the end of the year). With US ISM Manufacturing (officially) in decline for the second month in a row, and US Factory orders and car sales unexpectedly declining last month, there is strong evidence that the declining portion of the business cycle is starting to have an effect on the economy, bringing about the next leg down in "The Great Deflation".

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.