Economic reports continued to weaken in Q4, while the final revision for Q3 GDP held steady at -0.5%. The equity markets have certainly quieted down during this holiday season. The entire 4% range for the week was accomplished between the open and 3:00 on monday. For the week the SPX/DOW were -1.2%, and the NDX/NAZ were -2.4%. Bonds lost 2.0%, Crude -11.0%, Gold +4.0% and the Euro was +0.8%. Europe ended the week in line with the US -1.5%. While the Asian markets were -4.2%, and the Commodity equity markets were -4.3%. Since the surge in late November to early December the DOW has been marginally down four weeks in a row.
LONG TERM: bear market
It’s year end so let’s review the big picture. The chart is posted in the photo section (upper right). This Supercycle started back in 1932 during the last depression. While the general economy remained in a deflationary state, the stock market bottomed and completed a five year bull market (1932-1937). This was Cycle wave I of the Supercycle. A 50% decline followed the 1937 high into 1938, similar to our recent 50% decline from 2007-2008. The market then rallied over 50% but stalled, and then gradually drifted down into a retest of the lows in 1942. This ended Cycle wave II. For the next 30 years, the stock market experienced a series of bull/bear markets with higher highs/lows until it completed five waves in 1973. This ended Cycle wave III. Then between 1973-1974 the stock market again lost 50% of its value. This was only the second time since 1932 that the market had lost 50% of its value during a bear market (1937-1938 and 1973-1974). In late 1974 the market bottomed and rallied over 50% into 1975. Yet this time, instead of failing after the rally and drifting lower like in 1938, it stabilized and moved higher. By 1976 the stock market had completed a small five waves up from the 1974 and was challenging the all time highs. Cycle wave IV ended in 1974 and Cycle wave V was now underway. When examining Cycle wave V the activity been 1976 and 1982 is a bit tricky. However we have settled on Primary I 1976, Primary II 1982, Primary III 2000, Primary IV 2002 and Primary V 2007. Primary wave III was the longest wave and subdivided into 5 Major waves as labeled on the chart. The are several reasons for this particular count. First, the bull market from 2002-2007 was clearly a five wave structure with an extended fifth wave. This wave structure was similar to the start of the Supercycle between 1932-1937. An interesting ending. Second, the recent 50% decline in the stock market was only the third such decline since 1932. The previous events were both Cycle waves (1937-1942 and 1973-1974). Therefore this bear market is also of Cycle wave degree. Yet, since five Cycles waves have now been completed from the 1932 low, this bear market may possibly be of a Supercycle degree. What’s next.
After every 50% crash, including the 1929-1932 Supercycle bear market, there has been a 50% retracement rally. What occurs after this rally determines how severe the bear market will be. In example, during 1973-1974 the bear market dropped 50%, retraced 50%, and then kept heading higher. It never made a lower low. That bear market was over. During 1937-1942 the bear market dropped 50%, retraced 50%, and then gradually weakened. But it took three years to retest the original low with a slightly lower low. During 1929-1932 the bear market dropped 50%, retraced 50%, and then started heading lower and making new lows soon after. At every new low, the decline paused for a couple of months and the market rallied. When the rally failed to continue, the market again headed lower. Eventually the market finally made a new low and entered a sustainable rally. That was in 1932, and after the stock market had lost nearly 90% of it value. Of the three Cycle wave scenarios: 1973-1974, 1937-1942 and 1929-1932, the least likely is 1973-1974. The double bottom 1937-1942 scenario is possible, yet a modified version of 1929-1932 scenario is the most probable. Before drawing any definitive conclusions, the market first needs to establish that 50% retracement rally. Which is clearly a selling opportunity. Then, and only then, will we have an idea of what to expect next. Our indicators currently suggest an end to the recession/depression in late 2009. How severe the economic downturn will be, and how the market will respond to that data is pure speculation at this point.
MEDIUM TERM: downtrend low at SPX 741
From the November 21st low, this market has been uptrending in an abc. The ‘a’ wave topped at SPX 898, the ‘b’ wave bottomed at 818, and the ‘c’ topped at 919. Wave ‘c’ (101 points) was a bit more than 0.618 times wave ‘a’ (157 points). Since the double top at SPX 919 on December 17th the market has been gradually drifting lower. On monday the 22nd, the SPX hit 857 and was quite oversold short term. On friday the 26th, the SPX hit 874 just before the close, and is already getting overbought short term. Not much of a rally at all. This would indicate that this market should make another low before the uptrend resumes. Support is at the 848 pivot and then the 818 ‘b’ wave low. We are counting this first ‘abc’ as an A wave of a larger ABC rally. With this first ‘abc’ equalling 178 points (741-919), a pullback to 848 or 818 would set the market up for a good rally. Should the next ‘abc’, larger wave C, equal 1.618 times wave A. Then our targeted pivots SPX 1107 or 1179 should be hit. We have yet to see an overbought level, on the daily charts, during this entire uptrend. This would indicate there is more upside ahead.
Support for the SPX remains at 848 and then 789, with resistance at 912 and then 935. Short term momentum is nearing an overbought condition.
The European markets lost 1.5% this week, and should continue to follow the US.
The Asian markets lost on average 4.2%, and are displaying some mixed internal patterns during this rally. The strongest being Hong Kong, and the weakest Australia.
The Commodity equity markets were down 4.3% this week. Canada remains weak, while Brazil has been struggling to get above 41,000.
Bonds appear to have made a medium term top at 130.6 with negative divergences on the daily chart.
Crude appears to have hit its crash limit for now. Some positive action wed/fri suggests a possible rally back to $50.
Gold gained 4.0% this week but is again running into upside resistance during its uptrend. Should it clear will re-evaluate.
The Currencies had a quiet week: Euro +0.8%, USD -0.2% and the Yen -1.7%. The Yen appears ready to join the USD in its downtrend.
A very light week on the economic front. Tuesday, a consumer confidence reading, wednesday the weekly unemployment claims and friday ISM manufacturing. On friday the FED issues their statistical foreign exchange rates. Should be another quiet week. Happy New Year!