US markets stumbled this week after release of the FOMC statement at 2:15 on wednesday. Rates remained unchanged, but the FED extended mortgage and agency bond pricing support. The initial reaction was a 15 minute pop to a new uptrend high at SPX 1080. Then the market sold off hitting a low on friday at SPX 1041. Economic reports were mostly higher, but lower than expectations. Leading indicators rose, as did FHFA home prices, new home sales, consumer sentiment, and jobless claims were lower. Existing home sales dropped, as well as durable goods orders. For the week the SPX/DOW were -1.9%, and the NDX/NAZ were also -1.9%. Asia was -1.5%, Europe -2.0%, and the Commodity equities -1.3%. Bonds display a loss of 0.3%, but yields declined 15 basis points. Crude lost 8.9%, Gold lost 1.7% and the USD gained 0.4%.
LONG TERM: bear market
For the past twelve months the market has been on a wild ride. On 25Sept08 the SPX closed at 1209, on 09Mar09 SPX 677, and today 25Sept09 SPX 1044. This represents a 76% swing from SPX 1209. The only historical comparisons we could find were Sept 1937-38 a 55% swing, and May 1974-75 a 65% swing. Which is quite interesting considering many are suggesting comparisons between the 1937-1942 bear market, and the end of the 1973-1974 bear market. Economically, the years that followed each of the two previous swings were inflationary, and included many social disruptions. War in the former and oil embargoes in latter. Despite the volatility the SPX/DOW are closing in on the typical Primary wave B bear market retracement level of 50%. While the bull/bear market debate continues, let’s review.
Since 1929 there have been only four periods of time when the US market lost nearly 50% or more of its value: 1929-1932, 1937-1942, 1973-1974 and 2007-2009. In OEW terms these four instances are considered to be either Cycle or Supercycle waves. Historically, the time it took to end these bear markets was between 23 months and 60 months. In the first two periods, a 50% decline was followed by a 50% retracement, then the market retested or broke the previous lows. In the third period, the shortest, the bear market ended on the 46% decline. Our bear market started in Oct 2007 at SPX 1576 and by Mar 2009 hit SPX 667, for a 58% decline in 17 months. Since then the SPX has rallied to 1080, for a 45% retracement of the bear market in six months. Nothing unusual in comparison to the first two time periods. During the third period (1973-1974) which was again 23 months. After the 46% decline into the 1974 low, the market started impulsing in five waves structures. The first wave up retraced 46% of the bear market in 3 months. The second wave up was also three months long, and the total retracement was then 64% in seven months. In comparison to our 2007-2009 bear market, the first wave up appears corrective and retraced 32% in three months. This second wave up, also corrective and still ongoing, is nearing its third month, and the total retracement thus far is 45%. The bull market liftoff in 1975 looked quite a bit more bullish than our current rally from Mar09.
Examining the 2007 bear market thus far. The decline from SPX 1576 to SPX 667 took the form of a zigzag. We labeled it Primary wave A of a three wave ABC Cycle/Supercycle bear market. This zigzag subdivided into three Major waves: Major A Mar08 SPX 1257, Major B May08 SPX 1440 and Major C Mar09 SPX 667. Both Major waves A and C were five wave structures, and Wave B was a counter trend rally. At the lows we expected a 50% bear market retracement (SPX 1122) or a 50% rally, in the form of another zigzag to complete Primary wave B. Then Primary wave C would take the market down again to either retest the lows (1937-1942), or break the lows (1929-1932). We continue to hold this view.
MEDIUM TERM: uptrend hit new high SPX 1080
In review of Primary wave B we noted that it is taking the form of a zigzag: Major wave A Jun SPX 956, Major wave B Jly SPX 869, and Major wave C underway. The internal structure on Major wave A was also a zigzag, with Intermediate waves A and B simple structures, and Intermediate wave C a detailed five waves. The current uptrend, Major wave C is also following the same scenario: a simple Intermediate wave A and B followed by a detailed C. When making fibonacci comparisons we arrive at SPX 1158 if Major wave C = Major wave A, and SPX 1141 if Int. C = Int. A of Major C. Also at SPX 1122 the bear market has retraced exactly 50%. In addition to these price relationships we have OEW pivots at 1090, 1107, 1133 and 1168. Therefore, it is quite clear that there are a cluster of price relationships from SPX 1090 to SPX 1168, with the mean at SPX 1133.
Another recent observation is a cluster of turn dates over the past twenty years. The 1990 low occurred on Oct 11th, the 1998 low Oct 8th. Then we had the 2000 high on March 24th, the 2002 low on October 10th, the 2007 high on Oct 11th, and the 2009 low on March 6th. The months of March and October have played a key role in the past two decades. If we assume this trend will continue we would expect Primary wave B to end around the second week of October. Possibly between the 8th and the 13th, since the 10th and 11th fall on a weekend. If numerology is your game, Primary wave A ended on Mar 6th at SPX 667. Then Primary wave B could end on Oct 13th at SPX 1133. Food for thought.
Support for the SPX remains at 1041 and then 1018, with resistance at 1061 and then 1090. Short term momentum put in a negative RSI divergence at the SPX 1080 wednesday high, and then went extremely oversold on two occasions into friday. Counting from the Intermediate wave B low at SPX 979 in mid-August. The market rallied five waves up into late-Aug completing Minor 1 at SPX 1039. A 47 point pullback followed to complete Minor 2 at SPX 992. On wednesday Minor 3 completed a five wave structure at SPX 1080, and now the market has declined 39 points to SPX 1041 as Minor 4. The market is sufficiently oversold on the hourly charts, and nearly so on the daily charts. If this Minor wave 4 is similar to the previous one in May, it may bounce around for a fews days before ending.
There are two key points to observe in the coming week. First, should the top of Minor wave 1 at SPX 1039 be overlapped, then a potential ending diagonal triangle may be underway. Minor waves 1-2-3-4 should then be considered as Minor waves a-b-c-d of an abcde ending diagonal. Both counts are being followed on the SPX hourly chart. The second point, should the 1018 pivot be reached that would increase the probability that Primary wave B has already ended. The market dodged that bullet recently when the OEW 990 pivot held in early September. Quite a lot to think about in the coming weeks.
The Asian markets were -1.5% on the week, with Australia (+0.5%) displaying the only gain. Both China and Japan remain in downtrends.
The European markets were -2.0% as both England and Germany declined. Both still in uptrends.
The Commodity equity markets Brazil and Canada were -1.3%, again both declined but remain in uptrends.
Bonds display a 0.3% decline on the week, but yields declined 15 basis points. Still expecting about a 3% yield on the 10YR bond.
Crude made lower lows in its downtrend, -8.9% on the week. Still expecting $50 Crude in the months ahead.
Gold ran into Comex options expiration -1.7%. Uptrends remain in place for Gold and Silver, oversold short term, and still expecting $1100 Gold soon.
The downtrending USD (+0.4%) gained against the uptrending EUR (-0.1%), but lost against the uptrending JPY (+1.8%). The USD appears to require another push lower to complete the multi-month downtrend. The EUR is getting close to our fibonacci target as well.
A busy economic week ahead as G-20 concludes this weekend: Case-Shiller, final revision to Q2 GDP and non-farm payrolls. The week starts on tuesday with Case-Shiller and the Consumer Confidence reading. Wednesday we have the ADP employment index, the Q2 GDP revision, and Chicago PMI. On thursday the weekly Jobless claims, Personal income/spending, ISM manufacturing, Construction spending, Pending homes sales and Auto sales. Then friday the Payrolls report and Factory orders. As for the FED vice chairman Kohn addresses the CATO institute on wednesday, and FED governor Tarullo testifies in the Senate. On thursday, FED chairman Bernanke testifies in Congress regarding regulatory reform. Certainly halting the advancement of the HR 1207 resolution is numero uno on his mind. Also on thursday the Foreign exchange rates report. Best to your week!
At the begining of the month we added Natural GAS, Silver and expanded our currency coverage. In addition to the USD index, the EURUSD, JPYUSD and CADUSD, we added AUDUSD, GBPUSD, CHFUSD, ZARUSD and the following currency cross pairs: GBPJPY, EURGBP and EURJPY. Unfortunately some of the pairs are inverse to FOREX pairs, but this is out of our control (stockcharts). This week we added Wynn Resorts WYNN to our stock list, Jacob C. will be tracking it.