04/3/12 – Stock Market Update © ™

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 PUT A “POSSIBLE” PEAK ON MY CHARTS TODAY.

I hope I’m not crying WOLF and give an all clear in a few days.  But for now, this is my best thoughts.

I’m waiting for a confirmation in the other indexes so it’s not engraved in stone (is it ever?).  OK if we have a peak, what about it???  It just means I’m SHORT TERM BEARISH.  I think we will probably bottom in May and turn up into the election and make new all-time highs in the market indexes.  Doesn’t that sound like fun???  It also means a new buy point will emerge in the weeks ahead and we can all go wee wee wee all the way home just like the little piggie.

What’s the worst that could happen???  I’ve made a mistake on the count and we have finished the bull market that began in March 2009.  If this is true, we should watch carefully the depth and intensity of this decline for any clue.

Listen to last Thursday audio update from Jeff Saut (immediately below).  It’s really good.

HURST CYCLES

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JEFFREY SAUT

The following link is Jeff Saut’s audio broadcast for Thursday, 03/29/12.  Everyone should listen carefully and if you are a bond holder, it would be advisable to listen very carefully.  I have thought for some time that bonds could be ending their bull market, but Jeff seems to think that we may see more tangible evidence of this soon.

I played it on the blog and it takes a couple of minutes to load so give it a chance.

JEFF SAUT from last Thursday, 03-29-12

Jeffrey Saut of Raymond James is a very savvy guy and one of the few people that I follow.   I found Jeff among the talking heads on CNBC and 99% of the talking heads on CNBC are worthless.  When I saw Jeff the first time, he’s telling the audience different things than what everyone else is regurgitating.  Immediately this catches my attention because I’m ALWAYS interested in anyone that has a mind apart from Wall Street.  After listening to him over time, I realized this guy is smart, insightful and normally right on the mark.  I find people like this very infrequently.  I think of Jeff Saut as today’s version of Robert Farrell.  That’s a BIG compliment in case you don’t remember Robert Farrell.

Raymond James Investment Planning

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The following recording is about 8 minutes long.  FIRST UP on the recording is Jeffrey answering my email (the possibility of a multi-leg/year bear market similar to 1965-1974).  He begins my answer with a typical “Hey Jeff”, and then moves on to comment about an excellent book “One Way Pockets”.  It’s worth the listen.

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

Sorry about the quality of this recording but I was still using a PC in those days and didn’t have the nifty WireTap Sudios Lossless Original capability of recording directly from “line in”.

These 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 really BIG picture with thoughts from my mentors, Bob Farrell and Edson Gould.

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 (iPads rule).

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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.

All Rights Reserved  © ™

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4 Comments on “04/3/12 – Stock Market Update © ™”

  1. Bob Says:

    Hi Michael,

    I’m a technician and don’t let fundamentals influence my decisions.

    When I issued my sell on the April 3rd, it was completely based on what I saw on the closing charts. Only much, much later did I hear about the FED minutes. I wasn’t paying attention to the market on the 3rd and missed the early bus out of town. My short was executed after hours.

    Yup, this is my first short in some time and it’s not because I expect any major fireworks, just catching the other side of the market for awhile.

    For scaling, you should read “Money Management” in the Glossary. There is an “excellent” article by Walter Bressert about how to buy and sell a position.

    Fundamentally I do “listen” to the FED, but because the FED is “thinking” about taking the punchbowl away from the party doesn’t mean the party is over. The FED obviously thinks the economy is strong enough to propel itself, if not, they’ll be back in the game.

    There are a lot of things in the blog that can answer questions, the Glossary, past issues, the quotes on the right side of the blog, etc.

    Past issues are of real value because they contain a lot of random thoughts that may never occur in the blog again. Reading the book “One-Way Pockets” shows how we can learn from the past. I love that remarkably wisdom filled little book and lament that I didn’t read it 50 years ago.

    Bob

    Like

  2. focus12345 Says:

    Thanks Bob for sharing your thoughts. A few questions :

    Is this the first time you have gone short since your Feb 6 report-stop buying? Did you sell everything on that date ? Do you scale in your trades, I think I read Livermore use to do that. Whats your thoughts on QE3, if we don’t get it can this market hold up, since it seems to be the only fuel since 2009.

    Michael

    Like

  3. Bob Says:

    Hi Michael,

    I’ve been short since April 3 and I use the SP 500 futures.

    If you’ve never used the futures before and think about doing it, read my caution in the Glossary about futures and leverage. IT’S A DOUBLE EDGED BLADE AND DANGEROUS.

    I’ve got to check the glossary to make sure I have the story in there about me getting cut up bad by leverage in the 1980s (greedy and stupid of me). It’s great when you have the direction correct from the first but I am VERY OFTEN EARLY (good to know) and that requires patience and steady nerves. Seeing too far ahead makes for a dangerous trading companion and I always expect things to happen RIGHT NOW! Realizing that the economy is this huge lumbering object that can’t even think about moving quickly helps my patience.

    A friend of mine trades VOO instead of SPY. I think VOO has none of the longer term tracking problems that ETFs frequently have. You should verify any statement like that before using it.

    I try not to be too cute/greedy and trade the small stuff that I see comming. I’ve been left behind by poor tactics too often. Tactics can be as important (or more important) than calling a decline in advance.

    Thank you for the compliment, always nice to hear.

    Good Luck Trading,
    Bob

    Like

  4. focus12345 Says:

    Hi Bob,

    Are you currently short and what do you use to short ETF’s??

    Thanks for the blog it complements Terry’s.

    Michael

    Like


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