Still Going Strong – 10/29/2015

The U.S. stock market has been defiantly bullish here lately despite continued bearish sentiment among the media and analysts. I now think the amount of negative sentiment out there (in the midst of a rally) is the greatest I have seen since 2009.

I think the reason the market is rallying so decisively in the face of negativity is that, prior the current rally, it had begun to price in a recession. Typically, in order to come to terms with the prospect of recession, the market has to fall 15-25%, and the recent correction entered that range. So, right now, any non-recessionary news is bullish (short term moves aside), which I think explains the market’s resiliency on Thursday despite a GDP report showing only 1.5% growth.

After the 2009 low, the S&P 500 rallied 25%, then had a 6% pullback. After the 2011 low, the S&P rallied 20%, then had a 10% pullback.

Currently, the S&P has rallied 12% since the September low. I’m guessing the current rally will continue the progression of being a little weaker than the previous rally off a major low. If we get back to the May high of 2134, that would be a rally of 14% off the September low which fits the progression nicely.

Assuming we hit a temporary peak around 2134, the S&P would drop 5-10%, if it follows historical precedent.

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Updates on Disney, Europe, and China (10/12/2015)

Disney

In August, I wrote that I was expecting Disney’s stock price to drop to $75. Such a drop would have represented a return to the last significant low (October 2014), and would have roughly matched the magnitude of the 2011 drop.

However, after hitting a low of $90 on Aug. 24, DIS has followed the trajectory of the broad market indices. Given that the major indices all appear to have bottomed out, I think DIS has probably also bottomed out.

Here’s my current Elliott Wave chart for Disney
DIS October 2015

As for how high Disney will go, I do not have any good clues from technical analysis. Those who are more fundamentals-oriented are in a better position to answer that question.

Europe

In January, I wrote that I expected European stock markets to have a severe correction this year. I think that correction has happened as many European indices fell ~20% from their peaks earlier in the year. Given the sharp rallies recently, I think that the FTSE (U.K.), CAC-40 (France), DAX (Germany), and IBEX 35 (Spain) have resumed their long term bull markets.

In January, I thought that Italy’s FTSE MIB index was still in a bear market. However, during the most recent correction, the MIB did not get hit any harder than the other major European indicies. Thus, the MIB may be in a bull market after all, but I would like to see a new high with subsequent strength before getting too confident about that.

I think that Greece’s ASE index is still in a bear market that will continue until it takes out its 2012 low around 500.

China

I last commented on China in August. I think that China is still in a bear market given that the current rally on the SSEC looks very weak.

Shanghai October 2015

Long Term Outlook for the U.S. Stock Market (10-09-2015)

Back in March, I wrote that I was expecting a 10-20% correction during the summer. In that post, I described how I saw a George Lindsay technical pattern called the Ascending Middle Section playing out on the Dow. I first learned about Middle Sections on Carl Futia’s blog in 2009. He identified a pattern that occurred during 2005-2008.

Here is a current chart of the Dow with my Middle Section count. Click the charts for a clearer image.

dow middle section shorter image

Dow Middle Section October 2015

In March, I decided to label December 2014 as Point J. Even though the market crept to new highs in the spring, the market acted like it was in a correction rather than an impulse, so I consider December to be the “fundamental” top of the uptrend.

The Middle Section predicted that the time from Point J to Point AA would equal the time from Point E (Apr. 2014) to Point J. That relationship worked perfectly in this instance; both E-J and J-AA were 8 months! Given the strong rally over the past week, more evidence that the correction is over comes from the fact that the August crash hit the price targets projected by the Three Peaks Domed House patterns I labeled here.

The Middle Section also predicts that the time from Point AA to JJ will equal the time from Point E to Point AA. In our case, that implies a 16-month rally. Assuming the 16 months began in August, a top is forecast for December 2016.

There is substantial evidence that the top in late-2016 or early-2017 would be the end of this bull market. The AA-JJ rally on the Middle Section would correspond to a fifth wave on my Elliott Wave count from the 2008-09 lows, completing the bull market.

I have been using the NASDAQ-100 (NDX) for my Elliott Wave count as I think it shows the clearest pattern (Primary Waves are labeled in blue):

ndx elliott wave oct 2015

What are price targets for Primary 5? Any estimates are ballpark, but we could look for a relationship between Wave 5 and Wave 1. Primary 1 (Nov. 2008 – Feb. 2011) carried the NDX up 117%, over a period of 27 months. If Primary 5 lasts for 16 months, that would be a duration of 0.59 X Wave 1, which would give a percentage gain of 69%. That implies a bull market high of 6,400 on the NDX.

For the Dow, I think the bull market began in March 2009. If I apply the same methodology as I did with the NDX but use point gains instead of percentage gains, I get a target of about 20,000 on the Dow. If I use percentage gains, I get a target of about 26,000 on the Dow.

The NDX has risen so much during this bull market that I think percentage analysis is more appropriate than point analysis. However, point-based relationships might still be valid on the Dow.

But, regarding long-term outlook, there is an alternative situation that I should mention. I think there is a 33% chance that Primary 5 will turn out to be an extended fifth wave. The idea behind an extended wave is that the subwaves have the same duration and magnitude as primary waves. Thus, what you get is a bull market with essentially nine primary waves instead of five primary waves. Why do I think there could be an extended wave? There are two reasons.

The first is that popular sentiment regarding the economy and stock market has been strongly bearish throughout this bull market. Normally, by the end of Primary 3, the general public would be warming up to the market again. But my observations show only slight improvement in public sentiment since 2009. Typically, long bull markets (ones lasting > 5 years) end when the general population is very enthusiastic about the stock market and the economy. But I don’t see that happening any time soon.

The comments sections of media articles are loaded with comments denying that there is any economic recovery at all. It’s not just skepticism of headline numbers; many commenters even reject alternative statistics such as the more comprehensive U6 unemployment rate which also shows unemployment coming down. Opinion polls listed on Real Clear Politics show that nearly 66% of the population thinks the U.S. is headed in the wrong direction. Donald Trump, who would not be given any chance to win by conventional political analysis, is at the top of the Republican primary polls. This shows that people are deeply unsatisfied with the country’s status quo and want major changes in leadership.

The second reason I see a chance of an extended wave is that, we have not gotten a single interest rate hike from the Fed even though it has been six years since the economy bottomed out. Now, I do not subscribe to the idea that the Fed controls the stock market through monetary policy. Instead, I think that the Fed’s monetary policy affects economic expectations, which in turn affects earnings expectations, which in turn affects stock prices. However, if monetary policy fails to make a big difference on economic outlook (as was the case in early-mid 2008), the chain reaction stops.

Anyhow, in the present market cycle, if inflation stays low and the Fed does not hike rates sharply in the coming years, any recession in the near future is likely to be relatively mild, and with public sentiment already being bearish, a mild economic contraction might not derail the longer term bull market.

If this is an extended bull market, it would probably last until the mid-2020s. I know that sounds wildly optimistic, and I myself share that feeling, which is why I have only given the scenario a 33% chance. But it’s something to keep in mind given the current situation.

The Correction is Over (10/05/2015)

Given the sharp rally that we have seen over the past few days in all of the major indices, I have come to conclude that the correction is over.

spx successfull retest oct 2015

Notice that the S&P 500 had a very close retest of its August low and then engaged in a very sharp rally. Given that we had what looked like a complete, 3-wave corrective pattern from Aug. 24 to Sept. 17, followed by a classic breakdown, it would be very atypical to have a sharp, sustained rally like we have just seen if this is just a counter-trend rally.

Thus, I consider this rally to be the start of a new uptrend. When I have more time, I will make a detailed post on my outlook for the market over the next two years.