Another quiet week as the market did not make much progress either up or down from SPX 2258 where it started the week. The market rallied on Monday/Tuesday to SPX 2273, then drifted lower for the rest of the week, and closed at SPX 2264. For the week the SPX/DOW gained 0.35%, and the NDX/NAZ gained 0.50%. Economic reports came in positive for the week. On the downtick: durable goods orders, the Q4 GDP estimate, plus weekly jobless claims increased. On the uptick: existing/new home sales, Q3 GDP, FHFA housing, personal income, consumer sentiment, and the WLEI. Next weeks reports will be highlighted by the Chicago PMI and the Trade deficit.
GROWTH SECULAR CYCLES: past and present
Some market pundits are trying to compare the soon to be launched Trump-era to the Reagan-era. While they do have some interesting economic/philosophical relationships, the US economy was at polar opposites of the spectrum when Reagan took office compared to the present point in time.
When Reagan took office in January, 1981 the US was ending an equity market bearish Protest secular cycle (1966-1982) and about to enter an equity market bullish Unraveling secular cycle (1982-2000). Unemployment then was in double digits, inflation was double digits, US Debt/GDP was under 30%, the FED had rates at 13%, and four months later raised them to 14% in an attempt to choke the economy and kill the inflationary spiral of the 1970’s. The tactic worked as the economy entered a deep recession from Q3 1981 to Q4 1982. The SPX peaked with the election of Reagan in November, 1980 and declined with the economy into an August, 1982 low. The official end of the Protest secular cycle and the beginning of the Unraveling secular cycle.
When Trump takes office in January, 2017 the economy will look more the like the beginning of the last Growth secular cycle (1949-1966) than the above mentioned Unraveling secular cycle. Nearing the end of the Crisis secular cycle (1929-1949) unemployment was under 5% when Truman entered his second term, spiked a bit due to a recession, and was even lower than that when Eisenhower took office. Inflation during that period, at times, bordered on deflation. US Debt/GDP was beginning to decline from a 113% 1945 peak to around 80% when Truman entered his second term. And the FED had rates at 1.5% in 1949, and 2% in 1953. The SPX made a bear market low in June, 1949 and was just entering a 4-year bull market. Which would peak when Eisenhower took office in January, 1953. Then after short, and moderate, 8-month bear market another three year bull market followed.
Currently the unemployment rate is just under 5%. Inflation has been low for a number of years, with a short period of deflation along the way. The FED just raised rates to 0.75%, its highest level in 8 years. US Debt/GDP is currently at 105%. In February, 2016 the SPX ended a short, and moderate, 9-month bear market and a new bull market is already making all-time new highs. Notice the comparisons of Growth secular cycles.
One last comparison which was noted in the First Turning weekend report on December 10th. The political mantra during the Reagan-era, to the present, was to use the economy to build corporations, and a trickle down effect would benefit the working class. The political mantra during the Truman/Eisenhower eras, and until Reagan, was to use the economy to strengthen the working class, and their purchasing power would expand the economy. The political mantra appears to have come full circle with the election of Donald Trump. The trickle down mantra has ended, and a build up of the working class will be underway shortly.
LONG TERM: uptrend
We continue to label the market activity since the SPX 1810 February low as the early stages of a Primary III bull market. Primary waves I and II completed in 2015 (SPX 2135)and 2016 (SPX 1810) respectively. From the Primary II low we have labeled the three impulsive uptrends as Int. i, then Minor 1 and possibly Minor 3 of Int. iii. We note ‘possibly Minor 3’ as the current uptrend has somewhat stalled after it hit an all-time high of SPX 2278 a week ago Tuesday.
While we are still expecting this uptrend to hit the SPX 2380’s some time in January, and be similar in length to the first uptrend (Int. i) – which was about 300 points. It currently has stalled right around the length of the previous uptrend (Minor 1) – which was about 200 points. Should it fail to extend much beyond where it is already and enter a downtrend, we would then label it as another 1-2 subdivision, i.e. Minute waves i and ii of Minor wave 3. This pattern would be similar to what transpired between the years 1984 and 1985.
MEDIUM TERM: uptrend
The current uptrend which started in early November at SPX 2084 appears to have completed three waves up. The first advance was quite strong, SPX 2084-2214, and we labeled it Minute wave i. Then after a pullback to SPX 2187 for Minute ii, Minute wave iii appeared to be underway. Thus far the advance is shorter than the first wave up SPX 2187-2278. Which would be acceptable as a third wave, only if the fifth wave is shorter than both previous waves.
For now we are going to consider the latest advance as only wave 1 of Minute iii, while we await further market activity. The SPX 2278 uptrend high occurred the day before the FED raised rates 25 bps for the first time in a year. Since then the market has had two potential upside catalysts, i.e. the electoral college confirmation, and the best GDP report in two years. But the reaction was mute. Nevertheless it is the holiday season and markets have been fairly quiet. Medium term support remains at the 2212 and 2177 pivots, with resistance at the 2270 and 2286 pivots.
The first wave up of this uptrend, Minute i, was 27 small waves and travelled 130 points. Then after a Minute ii pullback to SPX 2187 the market has rallied in just 9 small wave and travelled 91 points. This seems a bit small for a wave three, unless as mentioned previously, the fifth wave is even smaller. While the recent sideways activity (2248-2278) could be counted as a fourth wave. The holiday activity makes that inconclusive. The last four trading days of this week had trading ranges of 7 or less SPX points. Maybe next week, after Monday’s holiday, will be the same.
Short term support is at SPX 2254 and SPX 2248, with resistance at the 2270 and 2286 pivots. Short term momentum ended the week overbought. Happy holidays!
Asian markets were mostly lower on the week for a 0.8% loss.
European markets were mostly higher and gained 0.4%.
The DJ World index ended the week down 0.1%.
Bonds continue to downtrend but ended the week flat.
Crude continues to uptrend and gained 0.1%.
Gold is still in a downtrend and lost 0.3%.
The USD is still in an uptrend and gained 0.1%.
Monday: Christmas Holiday. Tuesday: Case-Shiller at 9am and Consumer confidence at 10am. Wednesday: pending home sales. Thursday: weekly jobless claims and the trade deficit. Friday: the Chicago PMI.