Update (2-25-2018)

ndx 2-25-18

Given the strong rally over the past two weeks on the U.S. stock market indices, which carried the NASDAQ-100 well above the last temporary high on Feb. 7 without much resistance, I find it likely that the NDX will retest or exceed its January highs before the next phase of the correction begins.

I now think the NDX is in an Elliott Wave expanded flat, as shown on the chart above. In an expanded flat, you get three waves down to the Wave A low, then three waves up to the Wave B high (which is slightly higher than the previous market top), then fives waves down to the Wave C low.

It is very easy to count three waves down from the Jan. 29 high to the Feb. 9 low (labeled in blue on the chart above). Furthermore, in the expanded flat idealized schematic (see the link above), the Wave 2 rally within Wave A occurs closer to the bottom of Wave A than the top, and that was the case in the present situation on the NDX.

The next question we need to consider is whether the entire correction could have been completed at the Feb. 9 low. That is a possibility, although I find it more likely that there will eventually be a retest of that low. There are two primary reasons:

  1. The drop from Jan. 29 to Feb. 9 took place in only 9 trading days. Since the 2009 bear market low, there has never been a correction of 9-10+% on the major indices which was that short. The shortest ones (on the NDX) were 13 trading days (Jan – Feb 2010), 18 trading days (Sep – Oct 2014) and 19 trading days (Jun – Jul 2009) . All of the others were longer than a full calendar month.

2. The chart of the Dow Jones Industrials Average (shown below) looks more bearish   than the NDX.

djia 2-25-18

The Dow has not retraced as much of the Jan 26 – Feb 9 drop, and it encountered more pronounced resistance in the vicinity of the temporary Feb. 7 high.

As you may know, I have been tracking a Counts from the Middle Section pattern on the Dow, based on the index’s activity during 2013-2016:

dow middle section count 2-25-18

The pattern projected a top for Nov – Dec 2017, but the recent top on Jan. 26 was not far off. I had previously thought that the top of this pattern would coincide with the ultimate top of the bull market, but it now appears that will not be the case.

Nevertheless, if the Dow were to break below its Feb. 9 low, this would be at least the 5th largest correction of the bull market, and I think that would fulfill the Middle Section projection. But to qualify as such a significant correction, it is likely that the correction would need to last longer than the 9 trading day period of Jan. 26 – Feb. 9. Thus, the middle section count is another factor suggesting that the correction is not over yet.


Rally (2/11/2018)

ndx 2-11-2018

There appears to now be a clear five-wave pattern down from the Jan 29 high on the NASDAQ-100 (NDX). The rally that began on Friday is most likely the start of a B-wave countertrend rally that will ultimately be followed by a marginal new low.

Update (2/6/2018)

Despite the strong rally in Tuesday’s trading session, I still expect a retest of the lows on the U.S. market indices. The correction has only lasted a week so far, and I do not think that is long enough for investor sentiment to turn bearish enough to establish a bottom of intermediate-term significance. The only question is how many retests or marginal new lows there will be.

Below are two Elliott Wave scenarios on the NASDAQ-100

ndx 2-6-18


ndx 2-6-18 alt

Before this correction is complete, there are likely to be three obvious waves of Minor degree (labeled in magenta on the chart). The first scenario assumes that one more drop to new lows would be required to complete Minor-wave A, whereas the second scenario assumes that the B-wave rally is already underway.

The midpoint of the drop from the Jan 29 peak to the Feb 6 low is 6,695 on the NDX. The index is getting close to that level now. If we get sustained activity above that midpoint, I would assume that the B-wave is indeed underway and that a subsequent decline to new lows would complete the correction.




U.S. Bull Market is Likely Still Ongoing Despite Sharp Drop (2/6/2018)

ndx 2-5-18.png

As I have written before, I have long been expecting a drop close to 10% on the NASDAQ-100 (NDX) to match the drop of Apr – June 2016 (labeled as white/intermediate 1-2 on the Elliott Wave chart above) which ended at the Brexit low.

It looks like that correction is happening now. As I type this in the early morning of Tuesday, Feb 8, 2018, the NDX is down 7.5% from the recent high. There is likely more downside to go, as corrections greater than 5% in this bull market have usually ended up lasting 1-2 months.

Aside from Primary-wave corrections (labeled in blue on the chart above), the most severe correction of the current bull market on the NDX was a 13% correction during Sept – Nov 2012. As long as the correction does not exceed that severity, I will consider the bull market to be remaining intact.


2018 Stock Market Commentary (1/8/2018)

2018 is a difficult year to predict because of a potential divergence between the stock market’s cycle and the underlying economic cycle.

The U.S. stock market appears to be nearing the top of the bull market that began in 2009. Evidence for this comes from two sources: Elliott Wave and George Lindsay’s Counts from the Middle Section. The latter model projected a top by the end of last year. Although the top did not happen, the model nevertheless serves as evidence that the top could occur soon. However, it is likely that before the ultimate top, there will be a drop of 7-10% followed by a rally to at least a marginal new high.

My long-term Elliott Wave count allows for the bull market to run higher from its current levels as shown on the chart below.

ndx jan 3 2018

I consider the NASDAQ-100 (NDX) to be in Primary Wave V of the 2009 bull market. Primary Wave I was a 98% rally from March 2009 – April 2010. After the Primary Wave II correction during April – July 2010, an extended Primary III took place during July 2010 – Dec 2015, in which the largest subwaves had the magnitude of primary waves. After that, Primary IV was the correction during Jan – Feb 2016. Primary Wave V began from the Feb 2016 low and is still underway.

If Primary Wave V has a magnitude equal to Primary Wave I on a percentage basis, the target for the ultimate bull market top would be 7,700 on the NDX.

While it is well known that the stock market often tops out before the economy does, in the last 100 years, there has never been an instance in which a bull market ended amid economic acceleration beyond the levels previously seen in the expansion cycle. Typically, bull markets end when the rate of economic growth levels out or starts to slow down.

In order for the bull market to continue beyond the first half of 2018, we will have to see economic growth stronger than the norms of the last nine years. It is possible that the tax reform recently passed by Congress could serve as the catalyst for stronger economic growth. Going forward, for the bull market to continue, the average annualized rate of GDP growth would need to be at least 3%.

Regarding the job market, I think that, with the current socioeconomic environment taken into account, the economy is near full-employment. I reference the “current socioeconomic environment” because there are some constraints on employment at this time in history which are more significant in the current economic cycle than they were in the expansions of the 1980s, 1990s, or mid-2000s.

The biggest issue I see regarding employment is that the depth of technical knowledge required by many employers today due to automation of labor (including many job positions not traditionally considered tech-savvy) is difficult to firmly attain through the current educational systems.

That said, it is possible that with lower corporate income tax rates, business executives may decide that instead of putting the heaviest workloads possible on a few employees with extensive technical knowledge, it would be worthwhile to hire more employees and train them on tasks to enable more division of labor. This could enhance the sustainability of the business’s operations, and also provide more opportunities for experienced employees to contribute to business expansion.

The official unemployment rate (U3) is 4.1% (as of Dec 2017). The lows of the previous three economic expansions were 4.4% (Dec. 2006), 3.8% (Mar. 2000) and 5.0% (Mar. 1989). The broader, U6 unemployment rate, which includes part-time workers who need full-time work and people only marginally attached to the labor force due to economic reasons, stands at 8.1% (Dec 2017), vs. previous cycle lows of 7.9% (Dec. 2006) and 6.9% (Dec. 2000). U6 was not tracked prior to 1994.

Economics is not a precise science; thus, comparable numbers, occurring at different times in history, probably do not tell the same story about the underlying situation. Ordinarily, with an unemployment rate as low as it is today, there would not be much room for job creation to outpace population growth. To find a U3 rate lower than the 2000 low (which we are getting close to), you would have to look all the way back to 1969. Although the U6 rate in 2000 was about 1% lower than it is today, there were many cases of companies “over-hiring” in 2000 in response to the dot-com boom, leading to unsustainable job positions and new hires with questionable competence or reputations.

However, due to circumstances described earlier, I think that there is potential for the unemployment rate to fall further without overheating the job market, and that such a decline would be necessary in order for the bull market in stocks to continue throughout 2018.

Another factor to consider, when assessing the bull market’s continuance in 2018, is the state of public sentiment regarding the stock market and economy. In this area, I am seeing very conflicting signals.

Prior to 2017, public sentiment about the stock market had a definitively negative bias. Although a lot of negativity came from political conservatives who were critical of the Obama administration and the Federal Reserve, there were also people who did not see their own financial situation to be improving and were suspicious of the stock market’s rise. Political progressives, who supported the Obama administration’s policies, were generally not focusing their attention on the stock market.

The big question now is whether overall public sentiment started to turn in 2017. I was surprised by the number of politically conservative commentators who suddenly began speaking positively about the economy and the stock market in 2017, despite the lack of major legislative accomplishments by Trump and the Republican-controlled Congress. Perhaps I should have expected this enthusiasm, given the highly partisan nature of basically everything these days, but in 2009, after Obama took office, progressives were more subdued in their talk of economic and market recovery, opting to praise the social aspect of Obama’s politics while sometimes expressing concern about the rate of economic progress.

Could it be that the stock market’s rise in 2017 was in part due to individual investors, who previously avoided the stock market for political reasons, finally entering the market again? If so, is this a sign of a bullish bubble forming, that would signal a top in the near future?

I would be highly cautious about making claims that the current state of public sentiment signifies the late stages of a bull market. If the economy were to accelerate over the next couple years, there would be room for more investors who previously stayed out of the stock market due to financial difficulties to reenter the market as their financial situation improves. Furthermore, while sentiment among political conservatives has started to turn, sentiment among progressives is extremely negative.

However, it is hard to tell how much of the negative sentiment among progressives is directed specifically toward the economy or the stock market. The mainstream news media, which often has a discernible negative bias in its reporting on the Trump administration, seems willing to report economic and market statistics without casting a negative shadow over them. Much of the progressives’ angst over the country’s situation carries heavy social overtones, and they seem to be staying out of the fray when it comes to macroeconomic debate. The key question, which is very difficult to answer, is the extent to which these progressives are willing to invest their money in stocks despite the direction they think the country is headed socially.

With all things considered, I am going to refrain from making any definitive predictions about the stock market’s long term direction until we see how the economic backdrop develops over the next couple months, and whether the market makes any erratic moves to the downside in the near future. Given the precarious cyclical situation of the stock market right now from a technical analysis standpoint, I would probably conclude that the bull market has ended if we were to see a drop with accelerating downside after falling 10% from the highs.

Aside from that scenario, it is likely that the bull market will continue until we get a 7-10% drop followed by a rally to at least a marginal new high.

Employment statistics in this post are from Portal Seven (http://portalseven.com/employment/)

Tax Reform and the Stock Market’s Relationship to the Media (11-04-2017)

I agree with analysts who say that the recent rally in U.S. stocks has been at least somewhat driven by optimism that tax reform will happen. I find it ironic that the U.S. stock market has performed very well during the Trump administration despite the fact that the mainstream media is portraying his presidency with a decidedly negative slant.

In general, Wall Street-style business conservatives are not thought of as Trump supporters. They are generally thought to be supporters of either Republican or Democratic establishment politicians. Thus, they are not the types of investors who approach the mainstream media with an inherently contrarian attitude.

But at the same time, the stock market is often ahead of the news. Back in 2009, the stock market bottomed out before there was any sign that the recession was shallowing. Furthermore, at that time, the reaction to the Obama administration in financial media had a somewhat negative bias. The actual reporting of financial news was fairly neutral, but doomsayers critical of the administration were getting a disproportional amount of air time. After the market bottom in 2009, there was some sort of drop almost every time Obama announced a new policy proposal, but the trend remained higher.

Sometimes the stock market can cut through the noise of the media to see what is really happening in the economy. In the case of 2009, there obviously was optimism that the end of the recession was on the horizon even though headline numbers didn’t show it early in the year.

At the current time, the stock market’s performance over the past year clearly indicates that long-term investors see signs of an imminent acceleration of economic growth. In October 2015, I wrote that I expected the eventual top of the bull market to occur between 20,000 – 26,000 on the Dow.

If investors did not anticipate an economic acceleration, I would have expected the bull market to top out near 20,000, and it could have happened by the end of 2016, as I described in the post.

However, here we are one year past the more conservative target for a top, and the Dow has gone well above the lower end of my target range (last closing price was 23,539). This, to me, suggests that the market really does anticipate an economic acceleration. And it suggests something bigger than the uptick in GDP over the last couple quarters – similar growth spurts have happened throughout the bull market only to fizzle out within a year, and at market prices as high as what we have now, I don’t think investors would get so excited over it.

If there really is going to be sustained, improved economic growth, tax reform is the only source of it that I can see. That is why I think long-term investors really do expect tax reform to happen amid the current political environment.

But what would that mean for the market over the next few years? Lower corporate and personal income tax rates would be a major boost for the market in the short term. I say short-term for two reasons. The first is that a lot of the economic gains may be priced in already. The second is that stronger economic growth will accelerate the rise in interest rates, which would eventually become bearish for stocks.

As you know I have been calling for a bull market top by the 1st quarter of 2018. Tax reform could extend the bull market further into the year, but I still see the 2019-2020 timeframe as either flat or bearish. It is also probable that there will be a recession of some magnitude by 2020. Since the Great Depression, there has never been a continuous economic expansion lasting longer than 10 years, and the current expansion will be at 9 years in mid-2018.

That said, it is worth noting that the interest rate cycle associated with the current expansion is still in it’s early phases, and if there is a stimulative change in fiscal policy, the next recession could end up simply being a technical contraction that, despite rattling markets for a while, would not have a major impact on society at large.

But in any case, the economic and political events of the next 3-6 months will be critical to forecasts for the next few years.