Archive for March 2012

03/31/12 – Stock Market Update © ™

March 31, 2012

CLICK HERE IF READING A PDF FILE

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MY CHARTS

  • Keep up to date by spending a couple of minutes every day on my charts.
  • There are fewer charts with more concise information.
  • The first page has a bullet-point list of all the wave counts from super long term to very short term.

WHAT’S HAPPENING?

I’ve been very busy and negligent at writing recently and today is a quick note to tell everyone that you really NEED to watch my MY CHARTS on a daily basis.  This is my only QUICK and easy way of keeping you up to date.  I am playing around with these charts on a daily basis and they are almost always up to date on the wave counts.

The chart site has been completely made over.  It’s cleaner and fewer charts.  I was carried away with the number of charts I had, “were so preoccupied with whether or not they could, they didn’t stop to think if they should”.

You now can stay “up to the minute” (at least on a daily basis) on the shortest cycles by reading my notes at the top of the first page.  You will find my wave counts from Super long term to very short term.  These wave counts are also illustrated on certain charts.  These specific charts are noted in the written wave counts explanation at the top of the page.

I hope to get a regular letter out soon but I’ve been very busy with other things, research, health issues, etc, etc.  Whatever the reason, I haven’t kept you up to date.  But don’t forget I would write a few sentences immediately if a turn had  been made.  There’s only one thing that would stop me from doing that.

Meanwhile we are getting quite close to a turn that should have a worthwhile correction (see my charts).  After this correction we will be free to buy stocks again.

If everything works accordingly, we should have an interruption to the 3rd step up that will last at least several weeks (or more).  It will be long and deep enough to break the “look” of the rally since the November bottom.  This upcoming top will be the end of step 2 up since the October 4, 2011 bottom.

Later we should have a 3rd step up that will likely carry us to new all-time highs.  This seems like a very very long way from the March 2009 bottom, where thinking about the megaphone formation at that time were the thoughts of a lunatic.  During March 2009 I was just hoping that we had a stable bottom.  After a few months, thoughts of the megaphone formation were more along the line of “what if???”.

I have some interesting ideas for my next letter.  One of the ideas is to show some backdated charts of the Hurst cycle.  I’m interested in what the Hurst Cycle thought was happening at particular points in time; such as mid and late 2008, early and mid 2009.  I want to try and pin down when Hurst cycles began to believe that the March 2009 bottom was a MAJOR cyclic event.

I also have a recording from Jeff Saut from last week, which I thought was astute as usual.  I thought everyone should hear it.

I would like to post some notes on why the 3 steps work.  It is a fundamental concept about us as to why 3 steps work.  We’re surrounded by the 3s but usually ignore it.

Sometime during the period that I was subscribing to Edson Gould, 1973 to 1979, I changed Gould’s method of wave counting to my 3 steps up and 3 steps down theory.  It was also during this period that I noted a wave extension where a 3 step could turn into a 5 step (not a 4 step).  I got better at calling the waves as time elapsed, which is understandable, practice makes perfect. 

I think Elliott’s ideas self destruct frequently in today’s markets and their complexity is so extreme that you can manipulate the count to say anything you need.  What more can you say about that.

I’ll try to get a real issue out late this weekend or perhaps early next week.

HURST CYCLES

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JEFFREY SAUT

Jeffrey Saut is a very savvy guy and one of the few people that I follow.

Raymond James Investment Planning

The following recording is referencing an email that I wrote a few weeks prior to Jeffrey’s verbal comments on December 6, 2005.  I wrote Jeffrey about Bob Farrell and Edson Gould (two of my mentors) and the possibility of a multi-leg bear market similar to 1965-1974.  Jeffrey as usual had the near term outlook correct.  Jeffrey’s comments were after the 2000 to 2003 crash but 2 years prior to the October 2007 to March 2009 crash.  As you can tell from my letter I was thinking of the BIG picture.

Sorry about the quality of the recording but I was still using a PC in those days and didn’t have the nifty Apple software for recording directly from “line in”.  I recorded this from the speakers and it sounds very hollow but you will be able to understand it OK.  The recording is about 8 minutes long.  Jeffrey answers my email first and then moves on to some comments about an excellent book “One Way Pockets”.  It’s worth the listen.

Jeffrey Saut’s Verbal Comments Regarding My Letter From 12/06/05

The book Jeffrey remarks about is highly recommended by me and it’s $10 at Amazon “One Way Pockets”.   I have both the print and eBook version.

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FEAR, HOPE & GREED

Due to its importance, the following chart is going to become a constant in my blog.

The driving force of how the stock market arrives at a price is emotions and the primary of these emotions is “fear, hope and greed”.  It’s difficult for people to understand this principle because it doesn’t seem logical.

A comment I hear frequently is that the earnings of a company are still going up and the stock price MUST continue rising too.  That “can” be true depending on a lot of factors but it might not stop the market from cutting the PE of your stock in half.

Rising earnings and dividends were an ongoing theme throughout the 1973-1974 bear market.  Normally earnings suffer at some point during a bear market, but 1974 was the exception.  An over-priced market (remember the “Nifty 50” from 1972) plus an unstable political climate coupled with rising earnings came together in the perfect storm cutting the PE ratio of most stocks in half.

Mentioning the “Nifty 50” gives you some idea of the old fart that’s writing this blog.  I can make it even worse by asking; Do you remember President Kennedy jawboning the steel industry over their price hike in 1961?  There were consequences for those actions as President Kennedy was widely viewed as anti-business after the jawboning incident.  Naturally the stock market didn’t like that and since it was already ripe for a correction, it willingly obliged.  The market decline began in November 1961 (I think?).  But I remember very well the climactic plunge in May 1962 when the Dow Industrials lost 35 points in one day.  The Dow average was only 612 at the time and a loss of 35 points was huge.  It was a 5.7% one day plunge.  I thought the world was going to end as I had never seen anything similar (wait until October 1987).  I was a naive kid at the time and now I’m not naive, just an old kid.

Fear, Hope, and Greed

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CHARTS

  • In addition to keeping track of my blog, I would urge you to check my charts on a daily basis.  They will show you the current wave count or newest trend lines.  And for the latest update on my thoughts, my charts will always show a change to my outlook before a blog update. 
  • These are my personal charts and my playground for doodling trend lines, wave counts and other ideas.
  • I usually draw the trend lines and wave counts on a daily basis.
  • Page 1 – Index From Monthly to 5 Minute Periods
  • Page 2 – Trend Indicators
  • Page 3 – Trend Indicators & Hurst FLD Projections
  • Page 4 – Momentum Growth Stocks
  • Page 5 – Momentum Growth Stocks

WAVE COUNTS SIMPLIFIED

Sometime during the period that I was subscribing to Edson Gould, 1973 to 1979, I changed Gould’s method of wave counting to my 3 steps up and 3 steps down theory.  It was also during this period that I noted a wave extension where a 3 step could turn into a 5 step (not a 4 step).  I got better at calling the waves as time elapsed, which is understandable, practice makes perfect.

I think Elliott’s ideas self destruct frequently in today’s markets and their complexity is so extreme that you can manipulate the count to say anything you need.  What more can you say about that.

  • My wave counts are not Elliott Wave!  It’s different, simple and functions without a maze of exclusions.
  • There are 3 peaks (or valleys) to a completed wave count. A reversal of trend takes place after a completed wave count.   Often times it’s as simple as counting 3 bumps (or dips) on a chart . . . Other times, not so easy.
  • In a downtrend the same rules apply except you are counting 3 dips instead of 3 bumps.
  • 3 steps must stay confined to a channel.  Laying a straight edge on the chart will help you visualize the channel.
  • As the larger trend progresses, all of the steps that make up the trend will also be confined to a larger channel.  Sometimes a channel doesn’t become clear until the surge phase (vertical move) has ended and the market settles into a methodical uptrend.
  • When the market breaks its channel (regardless of the perceived wave count), the step has been terminated.  This may often be your best indicator that a wave count has been completed.
  • Sometimes ONE of the 3 waves will sub-divide into another 3 waves.  I call this an extension.  When this happens (1) the trend is still intact, (2) the overall channel will widened and (3) instead of a total of 3 steps, there will be 5 steps.
  • There are always trends within trends from the short term of a few days to the super long term trend that may last centuries.  Fitting it together gives you remarkable market perspective.
  • The correction following the second step is normally larger than the correction that followed the first step.
  • Usually I will use the terms “step” and “wave” interchangeably.  I frequently think of a step as shorter in duration and a wave as longer term; such as there are 3 steps to a wave.  But the steps/waves are all kinda the same as they fit inside one another like a matryoshka or Russian nesting doll.
  • THE FOLLOWING IS ALSO AN IMPORTANT CONCEPT
  • At the conclusion of a 3 (or 5) step move, their will be a counter move.  This counter move MUST be of sufficient strength (or duration) to BREAK THE CHANNEL of the prior move.  Breaking the channel has the appearance of breaking the “LOOK” of the prior move (channel).
  • If a channel break doesn’t occur after ALL of the counter trend steps have evolved, you have miscounted the steps and the previous trend is not finished.
  • Breaking the channel is a very important concept because this may be the only clue you have that your count was incorrect.
  • Reading the glossary helps in the understanding of this blog.  There are many other important facts in the glossary.
  • Glossary Link

ABBREVIATIONS

  • DJI = Dow Jones Industrials
  • DJT = Dow Jones Transportations
  • SPX = SP 500
  • ES = SP 500 Futures
  • COMPQ = Nasdaq Composite Index
  • TSX = Toronto Stock Exchange (Canadian blue chips)
  • SOX = Semiconductors
  • TXX = Technology

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  • Very Long Term – DOWN
  • Downtrend
  • Jan 2000 To Present
  •  Step 2 Down (of 3) Completed
  • Currently In Rally Phase From Step 2 Down

12-28-11 VERY LONG TERM

VERY LONG TERM COMMENTS

We have 3 possibilities for the future.

  • We have entered a very wide swinging market (megaphone formation) similar to that of 1965 to 1974. During that era we had three bear markets with two intervening bull market rallies.  Each bear market had a lower low than the previous bear.  The intervening bull market rallies saw new all time highs before the next bear market began.
  • We also have formed a huge head and shoulders formation since 1998.  If this formation is valid, the downside measurement calls for a bottom around Dow Jones Industrials 1,000.
  • We began a long term bull market in March 2009.
  • I favor the megaphone formation as the most likely scenario.

Since 2000 we have had two bear markets, 2000 to 2003 and 2007 to 2009. Like 1966 to 1974, the recovery from the first  bear market saw a new all time high (2007 peak). It’s possible that we may experience another all time high during the present recovery period.  This would support the megaphone formation.  A failure to make new highs would support the head and shoulders argument.  In both formations the conclusion of the present recovery would call for a third and final bear market. An estimated time for the conclusion of the final bear market is approximately 2018.

The lesser downside target of both formations is the megaphone formation as it likely calls for a bottom 1,000 to 2,000 points below the 2009 low, which would be around Dow 5,000.

In the head and shoulders formation the measurement calls for a bottom around Dow Jones Industrials 1,000.  This is almost an unimaginable event regarding the possible fundamentals to create this scenario.  If this did happen, everything that could go wrong would have to go wrong.  This scenario is so dark that it doesn’t seem possible but nevertheless, the head and shoulders formation is there and will be waiting until we pierce the all-time highs of October 2007.

Remember these are simply possible scenarios and are not embedded in fact.  Whatever the outcome, it never hurts to be a little cautious with some of your money.  But in the worst case scenario, everything that we take for granted as being safe . . . .  would not be safe.  This is something to never forget in the event things go very badly.

Hopefully we will never have to think about the worst case scenario.

This very long term thinking is almost not practical for investment strategies.  Following the long term strategy should be adequate.  But one should always keep this scenario in mind whenever we are on the verge of a new bear market.  If correct it could indicate how bad things could become.

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EDSON GOULD

  • Edson Gould, Premier Stock Market Strategist – Edson Gould had a profound influence on the development of my techniques and  indicators.  Prior to me subscribing to his advisory service, I was just one of the crowd.
  • After 40 years I still have many of the publications from his advisory service, “Findings & Forecasts”.  Fearing the loss of these hard copy reports I have recently scanned and created pdf files of these reports.
  • One of the prime indicators that I use (series #1) was mentioned by Gould only once in his market letters.  If you didn’t catch its importance, too bad, because he only gave you a peek.  I believe that he used this tool extensively and never told the world it’s importance.  Prior to Gould writing about this indicator I had been looking for one that had similar characteristics without success.  Thus when Gould wrote about it, I recognized instantly that I had struck gold.  I have modified this indicator slightly and researched it back to 1939 for the Industrials, Transportations and Utilities .  This was a lot of work as it was before computers and online data (remember when Barrons was available only on paper, still is for the distant past).
  • Edson Gould was truly a legend in his own time.  It’s too bad that today many people have forgotten or never heard of him or his discoveries.  This is a man that deserves to be remembered throughout technical analysis market history.  Below you will find the first page of some of his reports.
  • My Most Important Discovery by Edson Gould
  • It was also my most important discovery, for it explained the irrational volatility of markets that had mystified me in my early years.  During those early years I found nothing worked in predicting these irrational market swings.  But the fog lifted after reading this report and I began to understand how to begin predicting the market.  The book “Extraordinary Popular Delusions and the Madness of Crowds” is very useful in explaining crowd behavior.  This book can be downloaded for free in pdf format from Google Books “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds”
  • Edson Gould’s 1974 Forecast
  • Gould’s 1974 forecast kept me bearish and short throughout 1974 until the week before Christmas 1974, during which I began making long term purchases.  After that it was ride the bull phases that transpired from 1975 to 1982.  1982 to 2000 was the greatest bull market of all time.
  • Edson Gould’s 1975 Forecast
  • Edson Gould’s 1976 Forecast
  • Edson Gould’s 1977 Forecast
  • Edson Gould’s Five Year Forecast 1977 to 1982
  • This was a remarkable forecast in 1977, where the Dow Industrials had never been higher than 1,000. NO ONE had predicted a rise of this magnitude in 1977.  Most were waiting for a resumption of the bear market.
  • As part of the 1977 to 1982 forecast I have the following story. On Wednesday August 4, 1982 I went long the market for the first time in months.  By Friday, August 6 I was worried that I had made a mistake as I was deep in the red (I was long the Kansas City Stock Market Contracts).  The Kansas City Stock Market Contract was the first of the stock index contracts (February 1982).  It was based on the Value Line Arithmetic Index, margin requirement were quite low, and it had a multiplier of 100 times the Value Line Arithmetic Index, which meant the leverage was very high.  On Friday (Aug 6), my wife and I went to dinner and I told her my tale of woe and asked her whether I should sell my long positions.  I explained that my series #1 indicator had reversed and continued higher on Thursday and Friday but the market had continued lower.  Since the key indicator was usually correct, we decided to stick it out awhile longer (I was crazy in those days).  On Monday August 9, 1982 the market took off like a rocket and never looked back.  The ignition for the 1982 to 2000 bull market was underway.  I skyrocketed out of the red and had a big profit.   In August 1982 the only people that were bullish were Edson Gould, Robert Prechter and myself (probably a couple of others but I didn’t know them).  Everyone else was extremely bearish.  It was a perfect example of extreme crowd behavior.

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TRANSACTION SIGNALS

  • All actionable signals are only for short term time frames.  These signals are not designed for intermediate or long term time frames BUT . . . . .
  • After a short term buy signal, long term tax status  can be achieved by a continuation of the upward trend, which causes short term actions to morph into long term holdings. 
  • See more details in the glossary under “Taxes, Futures Contracts” and “Money Management”.

TRANSACTION RECORD

  • In this blog a warning of an impending bottom (or top) is often issued well in advance of the formal buy or sell date.  This allows thoughtful consideration prior to a formal action signal.  To get a sense of how this works, you should read the days prior to a formal buy/sell signal.  I often buy/sell in my personal account based on the early warnings.
  • The transaction record near stock market bottoms will show that I am very skittish and usually remain so until the new direction is well underway.
  • This blog was suspended the first time on 9/17/11 due to a death accompanied by a family illness. It was suspended a second and longer time on 9/27/11 due to an extremely serious family illness.  Blog resumption with comments and charts began again on 11/27/11. Unfortunately due to illness I clearly missed issuing a formal & important buy signal closer to the 10/4/11 bottom.  Hopefully this error will not be repeated.

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MISCELLANEOUS

  • There are useful items throughout this blog.  For instance, the “Wall Street Quotes” can be very instructive.  So make sure and look all through the blog.

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