Reconsidering NDX Wave Count / Three Peaks Domed House (11/23/2016)

In my last post on Elliott Wave, I suggested that the Nov. 4 low might have been completed an Intermediate Wave 2 decline within a Primary 5th Wave that began in February. But after staring at the charts some more, that count on the NDX just doesn’t look quite right.

ndx-questionable-wave-count

The drop from Oct 10/25 – Nov 4 just looks too shallow to be an Intermediate Wave 2. Given that the Dow and S&P are in a strong rally to new highs, I find it unlikely that the NDX will reverse downward and break the Nov. 4 low without having made new highs.

Thus, I now think a better wave count would be to label the whole period sideways period from August-November as a minor degree 4th Wave, as shown on this chart:

ndx-oct-22-2016

There also appears to be a George Lindsay pattern, Three Peaks and a Domed House, underway on the NDX.

ndx-tpdh-nov-23-2016

This is the strongest prospective TPDH that I have seen since the large-scale instance that took place on the Dow during 2014-15. Typically, the duration between Point 14 and the top of the house is roughly equal to the duration which the three peaks spanned. In the current instance, Points 3-7 spanned about two months, suggesting that the pattern will top out in early-mid January 2017.

A scenario in which the market drifts higher in December and then tops out in January would fit a seasonal pattern which has been rather prominent in recent years.

But now I should address the burning question of whether a January top would mark the end of the bull market. As you may already know, I am tracking another George Lindsay pattern, Counts from the Middle Section, on the Dow Industrials index. I last described it in detail in a post from September, but to summarize, I have two interpretations of the pattern which give different projections for the bull market top. One scenario projects a top in January 2017, and the other projects a top in Nov-Dec 2017.

I still favor the count in which the bull market continues through most or all of 2017. My view is that, in the current environment of low interest rates and bearish/anxious public sentiment, the only thing which could trigger a bear market is an outright economic recession. However, I think that the election outcome has greatly reduced the risk of a recession next year.

For reasons I described in my election commentary, I expect the Trump administration, in conjunction with the GOP-controlled Congress, to implement a fiscal policy that will boost economic growth. Although the growth acceleration could take more than a year to take off, the stock market is forward-looking, and if Trump keeps lower corporate tax rates and a more business-friendly regulatory environment in his agenda discussions, the market is likely to trend higher. It may be a volatile rise though, given the uncertainty regarding how some elements of Trump’s agenda will play out (similar to how, during Obama’s first year, the stock market exhibited sharp short-term reactions to all of his major policy proposals, even though the market trended higher).

 

 

 

 

Elliott Wave Update (11/10/2016, 2:00 AM)

It looks as if the NASDAQ-100 entered an intermediate degree Wave-2 decline in October, a scenario I described in this post. Whether the Nov. 4 low marked the bottom is highly debatable. Precedent from this bull market’s history suggests that the Nov. 4 low will be broken given that thus far, the NDX has only had a peak to trough decline of 5%, and the previous declines since 2009 that I have labeled as intermediate Wave 2’s ranged from 8 – 13% (June-July 2009, Aug 2010, Apr – June 2012, Sept – Oct 2015).

However, if you count the post-election futures plunge, the NDX had a drop of 7% since the October highs, which is close to the target range. So, that could have completed the correction, although it is also possible that the futures low represented a support level that will eventually have to be hit in the actual index.

But regardless of what happens short term, I expect the NDX to rally to at least 5500 by Q3 2017 as a powerful 3rd wave kicks in.

 

My Commentary on the U.S. Presidential Election

From an economic perspective, the last eight years have been rather ambiguous. Although the U.S. economy has been growing overall since 2009, GDP growth has not had sustained movement above 3%, the level which historically represented the long-run growth rate. Unemployment has declined from its recession peak amid moderate job growth; however, there are many signs that the economy has not yet returned to full employment, despite an economic recovery that has lasted a longer-than-average duration of seven years.

A wide range of issues have been cited as contributing to the weak growth rates, including tax rates, government debt, companies moving manufacturing overseas, and computerization of labor that has shifted skills in demand. I think that all of these factors have had a meaningful impact; however, considering the structure of the government, I consider fiscal policy to be the aspect of the economy for which the president has the most influence.

However, I do not see fiscal policy, consisting of tax rates and government spending, to be the primary driver of economic cycles. I see economic cycles as fundamentally driven by monetary policy, through the Federal Reserve’s influence on interest rates. Thus, fiscal policy affects the magnitude of economic activity rather than the direction of economic activity.

I perceive that this relationship between fiscal policy and monetary policy has been clearer over the past eight years than it has been at any other time in modern history. Because inflation has been very low, the Fed has been able to keep interest rates close to zero. This makes it virtually impossible for the economy to go back into recession. The fed funds rate has been below 1% since 2008. Under normal circumstances, if the rate were kept that low for several years, the economy would grow gangbusters briefly, and then inflation would rise through the roof.

But why has that not happened? I believe it is because the government’s fiscal policy has put a major damper on economic growth. Current tax rates are inhibiting domestic hiring and business expansion, but the continual threat of a crisis from the national debt load has made it difficult to cut taxes without massive cuts to government spending.

I do not think that either Hillary Clinton or Donald Trump has a fiscal plan that would reduce the debt load in the near term.  In fact, regarding the next two to three years, I may even concur with the analysts who say that Trump’s plan would cause a greater debt increase than Clinton’s plan, due to Trump’s unusual proposal of simultaneously cutting taxes and increasing infrastructure spending.

However, I am not averse to increasing the debt short-term as long as economic growth accelerates. The reason I say this is that stronger growth would enable the Federal Reserve to raise interest rates, which would strengthen the U.S. Dollar. A strengthening dollar would keep U.S. bonds attractive on the debt market, helping to prevent a situation in which creditors suddenly demand their money back and the U.S. is forced to default.

Many people are angry at the Fed for keeping interest rates low. They think that the low interest rate policy is a scheme to inflate the stock market and make rich investors even wealthier. Although I think the Fed could have started tightening rates a bit earlier, the bigger picture is that low interest rates are the only reason the economy has stayed afloat in the current fiscal environment. Without the support from loose monetary policy, the current fiscal policy would have put the economy back into a severe recession. Without monetary support, unemployment could have risen to a reported rate of 15-20%, with actual levels even higher. This is what has happened in some Eurozone countries which have high tax rates but no independent central bank to create an accommodative monetary policy.

Thus, I think that some of the frustration with the Fed is misdirected. I understand that there are consequences to keeping interest rates low forever. However, to raise interest rates substantially without detrimental effects, stronger economic growth and job creation need to be generated. That is why I am not opposed to a fiscal policy that cuts taxes even if it causes debt to rise in the short term.

Once the economy accelerates, I would not necessarily be opposed to some of the policies that Democrats are advocating, such as expansion of programs to address socioeconomic inequality, or new environmental regulations. However, bigger government cannot solve problems such as climate change and the shrinking middle class with an economic backdrop of 1% GDP. But if economic growth accelerates, more people will be working, wages will rise, and as a result, the government will bring in more tax revenue, which will enable them to fund programs to address various issues without major tax hikes.

Since this blog is focused on financial markets and economics, I don’t want to detour into subjects that are too far out of scope to address thoroughly. However, I should mention that I do not agree with all the ideas Trump has proposed on immigration and foreign policy. But at the same time, I do not see Trump as promoting the “us vs. them” mentality that progressives are accusing him of. I consider Trump’s worldview to be focused on American competence rather than American dominance. From what I see, he is not an imperialist who believes America has a mandate to impose its influence across the world and purify its culture domestically. Instead, he appears to simply focus on making the U.S. more proactive in its domestic and international affairs.

As everyone knows, there is a lot of controversy surrounding both major candidates involving matters from their pasts. I do not have a firm basis to say that the accusations directed at one candidate are more serious, or more truthful, than those facing the other. Thus, I have decided to vote as a pragmatist rather than an idealist. The question becomes, does one candidate come out substantially better than the other when the potential benefits and risks are weighed out?

I consider that analysis to favor Trump. I see Trump’s fiscal policy as considerably more in line with what the economy needs right now. The risks associated with his proposals on other issues are mitigated by his worldview which I mentioned earlier, as well as the government’s system of checks and balances. Thus, when weighing potential risks and benefits, I consider the balance to be in Trump’s favor sufficiently enough for me to vote for him in this election.

Update on Ford

I am concerned about the decisive downside activity below the August 2 post-earnings low of $11.9. I discussed in July how it looked like the stock was in an Elliott Wave uptrend; however, the bearish activity since late-April is starting to look more like a trend than a correction. Long term, it now looks to me as if the stock is in a wide range sideways movement ranging from $11 to $14, with the peaks and lows of this range varying depending on the overall stock market’s action and the macroeconomic environment. What would get the stock out of this range to the upside is if we get a sustained improvement in economic growth.

Update (10/14/2016)

It looks like some sort of short-term pullback in U.S. stocks might be underway, and I now think that we might have seen five waves of minor degree since the February low on the NASDAQ-100 (NDX). If, in fact, the five wave sequence is complete, the chart below shows the most likely scenario in my estimation.

ndx October 13, 2016.png

What would confirm the completion of the five wave sequence is if the current pullback extends to the September low at 4656. Under this scenario, the NDX is in an Intermediate Wave 2 drop and is likely to bottom out somewhere between the June low at 4179 and the September low at 4656. After that, I would expect a rally to new highs lasting until mid-2017, which would form the third Intermediate wave (white) within Primary 5.

As for my longer term outlook, I will remain bullish unless we get a drop from recent highs exceeding 10% on all the major indices.

 

Intermediate-Term Update (9/25/2016)

From an Elliott Wave perspective, it looks like the 4th wave scenario that I described in the last post played out on the NASDAQ-100 (NDX). When the NDX first made new highs, I was leery because the Dow was seriously lagging. But now that the Dow is also acting stronger, it looks to me like we had a completed 4th wave from the February lows.

So, assuming we are in a 5th wave now, the question becomes, of what magnitude is the 5th wave? It is possible that when the current rally terminates, it will be the end of the bull market that began in 2009. That scenario is shown here:

ndx-sept-23-2016-bull-market-termination-2016-projection

According to Elliott Wave theory, bull markets typically unfold in five waves of Primary degree. I think the fifth and final primary wave began at the February low. Elliott Wave theory also assumes that each primary wave will unfold in five waves of Intermediate degree. On the chart above, I have Intermediate degree waves labelled in white. Thus, you can see how the current rally could be the fifth intermediate degree wave within Primary Five, and thus, when this rally ends, the whole bull market could end.

Under this count, Intermediate Wave 3 lasted somewhere from 1.5 to 2.5 months, depending on when exactly it ended (there was a long sideways period in late-Aug to early-Sept). Typically, Wave 5 is shorter than Wave 3, so I would expect the current rally to be less than 2.5 months, and possibly less than 1.5 months. This suggests a top anywhere from late-October to early-December.

Evidence that the current bull market is in it’s final stretch also comes from a potential Count from the Middle Section on the Dow Jones.

dow-middle-section-scenario-1

I have discussed the Counts from the Middle Section before here. The idea is that the duration between the AA low and JJ (the bull market top) should equal the duration from E to JJ. Using this count, the precise date for a top is January 10, 2017. However, I don’t really like to pinpoint exact dates, and I think the target range for a top could span from late-December through January.

So, both the NDX and the Dow could be pointing to a major top within a few months. The NDX seems to be pointing to a sooner top, but it’s possible that the NDX could top out first in November, and then the Dow pops up to a new high somewhat later before a major downturn begins.

However, we still have scenarios which would allow the bull market to continue throughout 2017. Here’s another potential count for the NDX.

ndx sept 25 2016 bull market continues through 2017.png

With this count, Primary 5 still began at the February 2016 low. However, we are only in the first intermediate wave within Primary 5, and the five waves since February are only of Minor degree.

Looking at the Dow again, there is another interpretation of the Middle Section Count that could correspond to this bullish outlook.

dow-middle-section-scenario-2

With this interpretation, AA is moved to the lows of Jan-Feb 2016. If we use the Jan 2016 low, the projected top is in early-November 2017. If we take the Feb. 2016 low as AA, then the projected top is in late-December 2017. Broadly speaking, under this scenario I think we could expect a top during Q4 2017 or very early Q1 2018.

I personally think that the latter projection, in which the bull market continues in 2017, is slightly more probably. I think this because the general public is still bearish on the stock market and the economy, and unless the economy starts contracting, I don’t see the bull market ending with the current levels of bearish sentiment out there.

However, if we get a drop exceeding 10% on all the major indices within the next few months, I would think that a bear market is probably underway.

 

Update (9/15/2016)

The selloff this week in U.S. stocks has put us right back in the same situation I described in early August, in which I see potential for two different wave counts to unfold.

Scenario #1

ndx-sept-14-2016-four-int-waves-count

This count shows four intermediate degree (white) waves from the February low. Noteworthy evidence in favor of this count is the fact that the NDX’s swing up from the June low to the August top was almost as big as the swing up from the February low to the April top (the latter rally was only 28 points shorter). If this scenario unfolds, the current drop would have to bottom out above the April top of 4754, and a rally to new highs would follow. The longer-term prospects for the market under this scenario are highly uncertain.

Scenario #2

ndx-sept-14-2016-nested-waves-count

What would make this count likely is if the current drop extends below 4574 on the NDX. Here we would have a nested wave sequence within the third wave up from the February low. Significant evidence for this count comes from the fact that the Dow Jones Industrials Average has already overlapped it’s April top, and the S&P 500 is about to do so as well unless we bottom out ASAP.

So, we’re in an ambiguous situation now. Hopefully there will be more clarity in a couple weeks.