Published January 06, 2008
US Economic & Fundamental Condition
The current S&P 500 Price/Earnings - P/E value is still around levels where it's still considered expensive, as long as it holds above 15. A healthy, cheap stock market would show a P/E below 10. And it would most likely come down to the 8-10 level before a bear market is over.
Dec. 27, 2007 - CC is singificantly weaker (88.6) as we enter into this new trading year, compared to the 109 reading at the end of 2006. If the 2005 low fails to hold as support, then a test of the 2002 low is not ruled out in 2008.
Consumers represent two-thirds of all domestic spending in the United States. So measuring consumer opinions is an important part in gauging future consumer spending and in turn the economic condition. High Consumer Confidence holds up the economy.
The US unemployment rate is at 5 % as of Dec. 2007, up 0.5% from a year ago. Chart
Looking at the longer term picture, the TYX
is still within a 20 year bearish channel, after a failed attempt to break out from it in mid 2007. Currently it's near multi decade lows, so another test of these lows is a possibility in the early part of 2008, given the early stages of a downside pressure phase in Cycle10. If these important lows gives in, facing deflation is not an unlikely outcome, which would not bode well for businesses and consumers, over the longer term.
This Long Term Yield Chart
shows the development from 1983.
I'm taking a bullish stance on the Dollar
so in my opinion, the USD index could be at a higher level at the end of 2008.
Several factors supports this outlook. Using sentiment gauging techniques, the media's negative view about the buck has reached a point where taking a contrarian position could be smart.
Also, from a technical point of view, this index is apparently still working on establishing a bottom at important trendline support, generated by several important lows since 1998. It's critical that this long term trendline support holds, to keep this bullish view intact, otherwise it would instead indicate more to come to the downside.
Although i would be surprised to see it, any clear monthly close below this trendline, would once again move me to the bear camp. The bullish divergence observed in RSI 25 versus the lower low in the USD index is another positive factor to consider. A RSI 25 dip below 30, isolated, this would usually mean a bottom is forming, which RSI was not even able to do in 2007, despite the roughly 5 point lower low in the USD index, compared to it's low in 2005, where RSI actually touched the 30 level. To me, this is a very positive sign, especially when it occurs near major trendline support. Also, from a pattern point of view, Falling Wedges usually breaks to the upside, so any monthly close above the upper Wedge line in 2008, would confirm a bottom in place and could open up for even higher rates in the months and even years thereafter.
A positive wedge breakout ought to occur before the Apex of these lines is met, so 2008 could be the year to see this event.
As suggested in the previous update, the Dow Jones REIT Index 2007 Fall move, back to the earlier broken 50 moving average, was apparently a typical snap-back type before resuming on it's bearish path. A longer term bearish channel is established in this index, so the outlook is still bearish for Real Estate prices, until it's able to break out from it. The mid term outlook seems positive though, with a test of the upper channel line, within the first half of 2008, as a likely result.
Monthly XOI is still oscillating higher
within a long term, mildly wedge looking pattern. However, the advance is not backed up by higher high RSI 25 readings but is instead tracing out a bearish divergent pattern. So this reflect underlying weakness.
Because of the pretty stiff resistance and support generated by these two wedge lines, the strategy for 2008 is to look for
a clear (monthly close) breakout from this pattern. The most likely directional one, a bearish breakout, would be a stronger alert of a larger top in place, because of the overbought RSI reading. But until this occurs, as you know, the trend is your friend, in this case a long term bullish and impressive one.
I think some corrective action is in store for Gold in the first half of 2008, as it's about to reach a major trendline coming in from 2000, with RSI 25 at the same time well into it's overbought territory and barely able to test it's 2006 peak, despite the significantly higher high in Gold.
So this underlying weakness and technically divergent setup, at a point where Gold is running into major trendline resistance, makes it vulnerable to fall back for support. So a corrective phase may bring Gold rates back below the 800 level. If trendline support fails to hold, even lower rates could be the outcome. I will come back with important Fibonacci retracement levels in a future update, in case this support gives in to bearish forces.
XAU - Gold & Silver Index found support on an earlier broken trendline and is climbing higher within a bullish price channel. Near term target is the upper channel line around 215.
For new subscribers, according to the studies of longwaveanalyst.ca there are four "seasons" in the 50 - 60 year long Kondratieff Cycle, Spring, Summer, Autumn and Winter.
Stock prices perform well in the Spring with recovery in the economy as well. The last Spring phase was from 1949 to 1966.
The beginning of the inflationary summer is indicated by a peak in the spring bull market in stock prices (Last summer 1966 - 1981). The end of summer primary recession is caused by the cycle peak in interest rates. This recession is one of the four indicators signaling the beginning of the huge autumn stock bull market.
Four events occur at the end of summer and anticipate the beginning of autumn:
1) A peak in prices
2) A peak in interest rates
3) A bear market in stocks
4) A primary recession
It's the period of rampant speculation in real estate, bonds and especially stocks (1982 - 2000).
Beginning signaled by the peak in the prices of the large autumn stock bull market.
The purpose of the winter is to cleanse the economy of debt via payback, liquidation and usually bankruptcy.
This process creates tremendous stresses to the economy and financial system. (2000 --- >)
The next Spring should again bring growth and prosperity.
With Kondratieff's potential current Winter phase fresh in mind, let's take the current pulse on the stock market
and a peek into what the future may bring.
The broad market here represented by the S&P 500 recovered in 2007 but is probably forming a major Double Top from 2000, as suggested it could, in the Outlook Report for 2007. From an Elliott Wave Principle angle, the brief violation of the 2000 high, puts a few likely wave scenarios on the table:
1) The 2000 - 2002 decline marked the end of wave A of an ongoing huge Cycle degree A-B-C correction from the 2000 peak. So in this scenario, a major bear market from 2000 is in fact still intact, with the wave B part underway or already completed, as the Wave Principle allows for such an interpretation, through an Expanded Flat or Regular Flat wave count and still keep a bear market from 2000 a valid view, even though the 2000 high is violated.
If it's an Expanded Flat developing, once the wave B part has reached it's termination point, the last wave C part, is projected to take the market below the 2002 low, sooner or later, within the next decade.
2) This scenario suggest that the Bull market is still alive and kicking but unfortunately, that the last wave 5 of it could be underway (if not already completed, given the potential 2000 - 2007 Double Top possibility). The odds of a wave 5 developing, is better for the Dow, as it's well beyond the 2000 peak, although an Expanded Flat is not out of the question here either.
If it's a wave 5 we are dealing with, there is a chance that it will take the market even higher, into the 2010 - 2012 time frame. For more details on the reasons why, see the excerpt below. So in this count, the 2000 - 2002 decline was a severe corrective wave 4, as part of a five wave impulse structure developing from the 1966 low.
The problem with this count though, is that wave four's would usually turn into more complex and sideways corrections
and not of the sharp nature like we saw from 2000.
Anyway, regardless of what is the correct count at this point, the current S&P 500 chart shows a lack of backup
from RSI 25. This underlying weakness, despite the test of the 2000 high in prices, should go in favor of mid & long term bears. RSI is flashing a warning sign about this overall advance from 2002 and it takes just one more
monthly down close to see a clear breakout from the bullish channel from 2002.
Also, the OEX Monthly MACD turned bearish after the end of the Nov. 2007 trading month, for the first time in years. The WCA Model (Zig Zag Diagram) had a projected market turning point in mid Nov. 2007.
So at least some more medium term weakness could be in store for the broad market, if a clear breakout is coming. If so, first Fib. support is at 1270 for the S&P 500.
It took the QQQQ Monthly RSI 25 indicator
6 years to take it from an oversold state in 2002 to enter into overbought territory in late 2007 and sold off thereafter.
If trendline support fails to hold, there is plenty of room to the downside before QQQQ is once again in a longer term oversold state.
As for the longer term Market Outlook and to new subscribers, this excerpt from the August 2007 issue of Trader's Tips, gives important clues about what to expect from the stock market in the coming years and the next decade as well:
... "After doing some stock market related research, i came across an amazing method, which to a great degree clears my own fog, as for what really drives the economy and in turn the stock market. As many will know, consumers represents 2/3 of all domestic spending and it's ebb and flow is an important factor behind the fluctations in the economy (GDP) and the stock market. But after i found this statistical information, a more in depth, clear and accurate picture is given. And i must say it gives an eye opening overview of what could be in store for the economy and the markets.
The chart below shows a 80 year long, high accuracy correlation between an inflation adjusted Dow and the demographic, 5 year grouping of the 45 to 54 year olds in the US. This grouping is the big spenders which more significantly fuels the economy. There is a natural reason why these folks are the biggest spenders. After long careers their income is good but also with greatest costs, likely having their biggest house & mortgage, a more expensive car and with financially demanding kids in high school etc.
Chart courtesy of Vorago-US database, thegreatbustahead.com
From 2012 to 2025 the number of these 45 to 54 year olds (based on available government birth statistics of the population) will dramatically decrease. To get a clue of it's magnitude, we can see the group's decline comparison from 1929 and from 2012, on the chart. By using it's long correlation history as proof, the odds that a long term market top around 2010-2012 will occur, is quite high.
In my opinion, based on the above insight, a more technical way to confirm this huge market tide has likely changed direction around that time, would be to look for any monthly MACD crossovers in the upcoming years, especially in the 2010-2012 time window. And when/if it occurs, i intend to get out of any long term investments on the Long side and instead consider some long term LEAPS puts or go Short on some fundamentally weak stocks.
Given the quite steep rise of this grouping into 2010-2012 and probably with it, an overall continued rise for the stock market, the chance of MACD more accurately confirming when it's all over, should be good. Like MACD did, right after the major top in 2000, when it turned bearish in May and stayed bearish for years after that. An even more conservative, safe strategy would be to exit and re-enter on any monthly MACD crossover signals in the years leading up to the main time window, even if this means taking a few minor whipsaw signals on the way to locating the big one.
An alternate scenario is that if a correction is underway now, which the technical Double Top pattern often indicates, any advance thereafter may go into the 2010 - 2012 time window and possibly form a triple top from 2000. Or
in case the highs of this current Double Top is breached in that final advance, i'll come up with Fib. target projections, typically seen for wave fives in the future."...
Mid & Short Term
A recent COT Report (Commitment of Traders)
shows that "smart money" (commercial traders) is also bearish on the market, being net Short with 13,080 contracts as of 12/31.
The next Gann Angle convergence is coming up 02/19, 2008 (+/- 1 day) which marks 90 trading days from the Oct. 2007 high and 180 TD from the June 2007 high. The previous 11/22 GA marked a low in the market.
As for an update on the OEX Daily chart,
if the Nov. 2007 low (657.14) fails to hold, it would increase the odds of a wave iii impulse underway.
Trendline support is right below this low.
If broken, L2 DGL (50%) support comes in around the 620 level thereafter. Cycle10 should have bottomed out and RSI 25 dipped below 40 at that point, so the short term downside potential should be limited to this level.
As for an Advanced Get version of the wave structure from 2002, see this five wave count.
As for a popular individual stock, Google is pulling back from trendline resistance but could find support at the old channel roof it broke out from in Oct. 2007.
Bressert's Cycle10 & Bline
Along with the Double Top possibility in S&P 500, long term resistive Volume built up and even surpassed the supportive volume spikes observed at the 2002 lows.
So even from a Volume point of view, a larger top is not ruled out. It would take a reversal and a move above the 20% level in the SBV oscillator to generate a more positive outlook.
Chart courtesy of marketvolume.com
For new subscribers, a brief intro to the Bradley, an excerpt from the Outlook 2006 Report:
..."The Bradley Siderograph is a popular indicator many traders rely on,
to get an overview of possible larger turning points in an upcoming trading year. It is known for it's inversions, so it's not so good in showing whether highs or lows are coming but more so ... when important highs and lows can be expected. So using other indicators in combination with the Bradley could give useful clues about larger tops and bottoms."...
Bradley dates indicating market turning points in 2008, dates in bold marks more important turning points:
Chart courtesy of amanita.at
Artificial intelligence (Neural Networks) can be an helpful technique in finding potential tops and bottoms. This chart shows the calculated output until February 2008. Inversions can also occur in neural network calculations but in combination with other indicators, it's useful in finding out when larger trend reversals may occur.
Murrey Math Lines
A stronger advance started after the OEX found support exactly on the 5/8th MML early in 2007. The OEX high for 2007 nearly reached the 6/8th MML.
The 5/8th MML should be strong support, as it's usually difficult to enter the 3/8th - 5/8th range again, once broken out from it.
This survey report is used to determine the percent number of bulls to bears, to find sentiment extremes that can lead to market reversals.
I.e. a reading above 60% Bulls could mean a bearish reversal is near.
As of Dec. 31, 2007 the II Chart shows:
Chart courtesy of market-harmonics.com
Bullish Percent Index
BPI closed at 50 Friday, it has yet to reach an oversold condition. Support comes in at around 47.
Chart courtesy of stockcharts.com
Using daily EUR/USD closing rates, this current preferred wave count shows a five wave impulse structure from 2007, soon coming to an end.
This view is supported by the situation in the USD Index, a potential stronger dollar should put pressure on this pair, which fits with a wave 5 top. An a-b-c corrective zig-zag is likely to take rates back for a test of the Dec. 2007 low thereafter. Near term, this pair is struggling to overcome strong trendline resistance. Another test of it is possible next week, given the favorable Cycle10 phase and wave 5 push higher.
I wish all readers and trading friends a prosperous 2008!
Please, tell your friends about this
Free Stock Market Outlook 2008 Report.