weekend update

REVIEW

The highlight of the week was the second downward revision of Q3 GDP. From the original estimate in late October at 3.5% growth, it has now been revised down to 2.2% growth from the first downgrade of 2.8% growth. We posted a chart on wednesday of the year over year changes in quarterly GDP since 1948. Notice the spikes in growth coming out of a recession. No such spike has occurred yet. Also reported this week was a decline in consumer sentiment and new homes sales. On the upside were reports of existing homes sales, consumer income/spending, durable goods orders, and an improvement in the weekly jobless claims. The markets continued their year end rally with the SPX/DOW +2.1%, and the NDX/NAZ +3.5%. Asian markets were +2.5%, European markets were +2.8%, and the Commodity equity markets were +2.0%. Bonds lost 2.9%, Crude gained 4.9%, Gold slipped 0.6%, and the USD added 0.1%. Case-Shiller homes prices highlight the upcoming holiday shortened trading week. Happy holidays!

LONG TERM: bear market rally

Due to increasing interest in asset classes other than just equities. This week we are going to forgo the usual long term view of the US equity market. It has been covered quite extensively in the past two weekend updates. Instead, we are going to provide a bit more detail in the other various asset classes we cover.

MEDIUM TERM: uptrend makes new high at SPX 1126

The three Major wave Primary wave B has been rising since Mar 09 at SPX 667. The third of these Major waves has been rising since July 09 at SPX 869. This last uptrend has been quite complex to track, and it appears slightly different on the SPX and DOW daily charts. Nevertheless, we have been expecting one last five wave rally into the Major wave C and Primary wave B high. Most of our technical indicators point to a potential top near the SPX 1160’s area some time in January 2010. Then after price, time, fibonacci relationships and the OEW pivots converge. The bottoming phase of the 4-year cycle should negatively impact the market. Currently we’re expecting a retest of the Mar 09 SPX 667 low in late 2010. When this occurs Primary wave C should have concluded, and with it the bear market of 2007-2010.

SHORT TERM

Support for the SPX remains at 1107 and then 1090, with resistance at 1133 and then 1168. Short term momentum was quite overbought at thursday’s close. From the mid-december SPX 1086 low the market has rallied in three waves: wave 1 SPX 1116, wave 2 SPX 1094 and wave 3 SPX 1126 thus far. This third wave has already entered the range of the OEW 1133 pivot. We’re expecting this pivot to offer some resistance as the rally works its way into the long term 1168 pivot. This past week we observed light volume and gradually rising prices. Expecting more of the same in the week ahead. Best to your trading!     

Bonds: bearish

The following link: http://stockcharts.com/h-sc/ui?s=$TYX&p=M&b=1&g=0&id=p99568977581&a=155859886 provides the best picture we can offer for the US bond market. Bond yields have declined from Oct. 1981 and 14.59% yield, until Nov. 2008 and a 2.52% yield. This illustrates a 27 year decline in long term yields, and inversely a 27 year bull market in bond prices. Nearly the entire life of a 30YR government bond. In OEW terms, we count this entire bond yield bear market as a Primary wave double zigzag into that climatic 2.52% spike low. Notice during the entire decline every rally has been contained by the 89 EMA. Switching now to the more commonly traded 10 YR bond. We present a more detailed chart of bond yield activity since 2003: http://stockcharts.com/h-sc/ui?s=$TNX&p=W&st=2003-01-01&id=p00306120473&a=109167051. Notice the 10YR yield bottomed at a lower 2.04% in Nov. 2008. Since then, however, yields have been rising. Quite dramatically at first, in the first six months, then after a consolidation period they are now rising again. We’re expecting the 2008 highs (4.32%) to be challlenged first. Then the 2007 highs (5.32%) will be challenged after an interim correction. Overall we anticipate bond yields will be in a bull market for the next couple of decades. This suggests rising yields for bills, notes and bonds, with declining bond prices for years to come. You can review all the bill, note and bond charts on pages 11 and 12 with the following general link: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987.

Crude and Commodities: bullish

The following link: http://stockcharts.com/h-sc/ui?s=$GTX&p=W&st=1999-01-01&id=p84888091294&a=154815069 provides a long term view of the GS Commodity index. The GSCI is a weighted index based upon worldwide consumption of the major commodities, and is adjusted annually. The largest component is naturally energy (70%), then agriculture (14%), followed by basic metals (8%), livestock (4%) and precious metals (3%). Historically, commodity bull markets last about 13 years and are followed by about 21 years of bear market activity. This commodity bull market cycle started in 1999. After a nine year bull market advance from just under 2,000 to just under 11,000 the index collapsed in the panic of 2008. We labeled the rise as Primary wave A and the collapse as Primary wave B. A rising Primary wave C should carry the index back to the 2008 highs or beyond by 2012. Crude, the largest component, displays a similar pattern and its chart looks even more bullish: http://stockcharts.com/h-sc/ui?s=$WTIC&p=W&st=1998-01-01&id=p66556942900&a=67200088. The other sectors have been bottoming one by one. Agriculture and precious metals bottomed along with crude in late 2008. This was followed by bottoms in basic metals early 2009, natural gas in Sept. and then livestock in Oct. All sectors are now rising and in support of the overall bull market in commodities. You can review all the commodity charts on pages 9 and 10 with the following general link: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987.

Currencies: USD bearish

The following link: http://stockcharts.com/h-sc/ui?s=$USD&p=W&st=2004-10-01&id=p33400751035&a=67200089 provides a view of the USD index (DX) from 2004-2009. It covers a shorter timeframe than the other charts. Yet we feel it is representative of the USD since all the OEW patterns have been repetitive since 2001. Longer term, in 1985 the USD peaked at 165 and last year it traded as low as 71. This represents a greater then 50% decline, versus other major currencies, over the span of two decades. Naturally this does not represent the loss of purchasing power over the decades, due to the debasing of the USD and all currencies worldwide. The USD resumed its bear market in Mar 09. We’re expecting the 2005-2008 wave pattern to be repeated between 2009-2012. We continue to like the AUD, CHF, EUR, GBP and JPY after their current corrections conclude. You can review all the currency charts on pages 12 thru 14 with the following general link: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987.

Foreign Markets

Of the thirteen foreign market indices we follow, the two most bullish wave patterns are being displayed by Brazil and Hong Kong. Both indices bottomed in 2008 and have been impulsing higher, in similar wave structures, since then. At this point in time, Hong Kong: http://stockcharts.com/h-sc/ui?s=$HSI&p=W&st=2002-10-01&id=p95762089655&a=114063035 and Brazil: http://stockcharts.com/h-sc/ui?s=$BVSP&p=W&st=2002-01-01&id=p94014598473&a=106223079 could experience serious corrections during the upcoming weeks and months. Especially when Primary wave C gets underway in the US markets. The best time to enter these types of bull markets is during sharp corrections. Like the corrections both indices displayed in early 2004.

NEXT WEEK

Economic activity is light again in the upcoming shortened holiday week. On tuesday, Case-Shiller reports on housing prices and Consumer confidence is released. Wednesday we have the Chicago PMI, followed by the weekly Jobless claims on thursday. That’s it! Thursday the markets close early and friday is January 1st 2010. Hope we have been of some assistance in navigating these markets during 2009. Wishing you and yours a healthly, happy and prosperous new year.

CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987