The Very VERY Long-Term Picture of the S&P 500 and Where We Are at Within It

I want to discuss the very long-term picture tonight. I’m feeling wordy and talkative, so some of this might be boring (that’s your warning).


You will from time to time see long-term counts like this:

SPX

Even I posted some examples of destruction like this in 2020 for the lolz. This is some real armageddon shit. Some of the Elliotticians are looking for the end of the world, and one “modern father” (Robert Prechter) has been dragging “The Big 5” up along with the market since I’ve known of his work (beginning in at least the mid 90s).

I am not saying this entirely with derision, but some Elliotticians are literally (I mean this) looking for the rapture. However, people have also been eagerly looking for that for many hundreds of years and it’s probably not a good account of history unfolding. But, I will set religious beliefs aside, and I tolerate people believing as they wish.

A major flaw with taking a count like this seriously is that it ignores the nature of money in fiat and partial-fiat systems. I have discussed this a bit before when talking about the SPX/Gold ratio (for instance, here). Even in a post-apocalyptic world, a decline like this would allow the last rich man in America to buy all of the S&P 500. And that’s just not going to work. And if you look at the super-duper-duper long term charts you’ll see that prices don’t do this.

And in fact, you never ever want them to. There are lots of “hard money” folks out there (justifiably, too, I suppose—who wants their purchasing power to always be in a state of erosion?), but let me explain why that will never work. A hard money system is so austere, that it will send us into the Dark Ages in a generation, and here’s why. If money is “tied” to a commodity like gold, the economy will only grow as fast as new gold can be mined. And the rate at which gold can be mined will always be in a downward slope (as major veins are exploited first, and then chemical mining replaces that, as it has). Now think about that. A system like that will force a perpetual recession. A terrible idea. And in fact, you can actually track the Rise and Fall of the Roman Empire not only by conquest and defeat, but just as well by their discovery of new gold and silver mines. Periods of flourishing followed new discoveries. My point of all of this is: they figured this out a long time ago (too late for the Romans), and the price we pay to always be in a state of relative “expansion,” new homes and roads and schools, is purchasing power erosion. And if you like air conditioning and lights and things, then you also may need to expect the markets to always tend fairly hard up and to the right.


Now, that’s not to say that great big bear markets can’t happen, they do and they will. And when the pandemic hit and they closed all the major world economies in unison, I thought there was a good chance that we could be ending a long-term debt cycle and that one such big bear market would happen. But, given the nature of the rally out of that low, and given the nature of sentiment during that rally, I abandoned that view and adopted the view that we still have a very long way to go (years and years still).

The markets don’t tend to crash, rally to new highs, then crash again in the span of a few years (in fact they never once have). Not even in tumultuous times of civil war, etc. And so if we do have a big crash here, it would actually be entirely unprecedented, given that we just had the COVID crash. And I know what people will want to say: the bubble the Fed has blown is unprecedented, etc. But maybe that isn’t true, so bear with me.

The Great Depression and probably the entire swing from 2000-2009 were “banking crises.” And these only happen about every 80-100 years. And so if you’re looking for Grand Supercycle 5 up here (or bigger), you’re looking for something much bigger than a banking crisis. You’re looking for nuclear war or something like that. And hell, if that ever happens, none of us are going to be worried about trading.

But, let’s assume that’s probably not going to happen. What we do know is that since the GFC, banks are very well capitalized, and so there probably isn’t a banking crisis just around the corner, even with some rate hikes. And there’s nothing like a subprime lending problem bubbling under the surface, either. There’s just no subprime mortgages out there. There could be issues with the Euro-dollar system, but there are probably ways for them to adjust that system to avoid a catastrophe. Maybe there is something else, but I don’t see it yet.


So, let’s assume that we don’t have a crisis of such a magnitude ahead of us. And let’s also consider something strange, something even Elliott himself considered: it’s not always clear that indices move up, in the long-term, in impulse waves. Odd, yes? Of course, most individual names do. But, there are strange issues when looking at very long-term charts of indices that incline me to believe that they may not move up in “true” impulse waves. And that helps to explain why they just keep on going up. “Corrective” waves can just keep doing that forever, if need be. Centuries even.

So entertain that thought and let’s look at the S&P 500.

I have considered this thought before, as has the likes of Jeffrey Tennant (I don’t know of anyone else). It is possible that the GFC was an “a” wave of a very large degree. And the rally from that low a “b” wave, of that same degree, and so this (now) bear market we’re in is the “c” wave also of that degree, like this:

SPX

And there’s a lot a like about it.

For instance, you will see some bulls offer this count, locally, from the COVID low:

SPX

And I am open to it, but, what I don’t like about it is this. The destruction we’ve actually endured is staggering. In the GFC, something like 2-3 trillion dollars was wiped off the face of the Earth. And a month or two ago, I saw a figure that said over 7 trillion had been wiped away since our all-time high, and I can’t even imagine what it is today. So, this just feels way too big to be a “2” of this degree. The carnage, market-wide, is a bit more akin to the GFC in a way (I know we haven’t had banking failures and such).

It’s one of the reasons I have struggled to grasp the structure in its entirety as it has unfolded. It’s hard to get the feel of a wave structure that’s akin to the GFC up here.

But, let’s examine that “corrective” count some more. If the GFC to all-time high to now is an a-b-c (purple), then leading either to the top of the GFC (or the dot-com top; either will do, as both highs are really close in price, so it makes little difference) must have been some “a” of a larger degree (I have that in light blue below), and it means that the purple a-b-c is “b” of that larger degree, and when we’re done with our present bear market, we should embark on a very big light blue “c.”

SPX

That could go on for years and years. Let’s zoom in to our present situation. There should be a fib relationship between purple “a” and purple “c.”

We are at one such relationship now (the orange box). One other reason that I’ve had difficulties these last weeks is that I don’t really know which fib relationship is going be the fib relationship. But I do have confidence that one of them will work, and at some of our prior lows (especially the 5/20 low), they have been candidates.

SPX

If these bullish possibilities are right, then since we’re at a good fib now, we could simply rally straight away from here. We would say we’re wrapping up the “underthrow” of a bullish wedge and we should get moving. However, I still can’t rule out the bad stuff, either, as we have another good fib relationship below us that would conform to some of the structures I discussed today (here, here).

But, regardless of which of these come to pass, what I don’t expect is a protracted, multi-year decline. I expect this to be one of those “one and done” bear markets where we hit 20-30% and that’s it.

Note also that right in between these two levels is the 250-week EMA:

SPX

It is conceivable that we go to the lower fib beneath us, pierce that EMA and rally like Armageddon is coming if we don’t. Review the article I wrote regarding this EMA here. It’s very unlikely that we crash precipitously in anything like the heart of the GFC from here. Now, if we rush down to 3350 next week to hit that fib, that’s going to feel pretty crashy given the last few weeks, but I think that should be about it if we do that. It shouldn’t be like the center of the GFC, I wouldn’t expect.

Sentiment is worse here, right now, than it was at the bottom of the GFC and breadth is as bad as it was at the bottom of the COVID crash. I think it’s unlikely that we’re in the middle of a move (we really should be nearing the end of a move). And it would make sense for sentiment here (purple “c”) to match the sentiment at the bottom of the GFC (purple “a”). I mean, think about that: banks were failing everywhere, and folks are every bit as bearish here, just a hair inside technical bear market territory. It’s amazing (to me).


Now, once we get this purple “c” out of the way (and I do hope it’s at one of these two fibs; we’ll find out very soon if I’m right about that), we should embark on light blue “c” and I do have targets:

SPX

I have picked 4 sensible fibs. I think 7700 is probable, It could go to the others, and it could also to higher ones (like the 3.618), but we will just have to see what it looks like as it unfolds (if it even does). I would expect some kind of large, 5-wave structure. So, on a big scale, every time we see 5 waves, we should become cautious. But this structure should take years and years.

And, even if we do get up there, I still wouldn’t expect Armageddon. If we hit that 7700, that should be an “A” of a stupendously large degree. And it would be followed by a “B” wave of the same stupendously large degree. But those are often shallow, and sideways, and I would expect something like the 1960s-1970s, a sideways broadening formation or something that may last 20 years. And if it travels back to the 38.2% (back from 7700), it just so happens that it would retest the all-time high we just made:

SPX

In a structure like that, there would be multiple 30-35% bear markets (probably 3 of them), but no banking crises. Maybe a long, stagflationary period where inflation is the lever behind an earnings multiplier correction, where asset prices remain “elevated,” sideways, but inflation gradually brings GDP up to prices and earnings, etc.

And, as odd as it may sound, by the time we get to red B, stocks should be very cheap by the standards of historical ratios.


At any rate, I wanted to share these thoughts with you guys (and gals). I know the market we’re in has been hard, and I’ve had difficulty pointing and saying, “we’re going to go right there,” but it’s partly because I don’t anticipate a relentless, multi-year bear market that’s made me shy of the downside. It’s because I have reason to believe that we have something tremendous coming soon and I’m not in the mood to be looking too hard down when it comes.

So, let’s see if either of the two big nearest GFC-related fibs will provide us with a permanent low, either here, or with one more drop to 3350.

And as I’ve mentioned before, if we do lose the 250-week EMA, and attempt to and fail to recapture it, I will then prepare for a GFC-style swoon, but even then, I think we will have plenty of time to prepare (weeks). But so far, a retest of this long-term EMA is still healthy long-term bullish behavior, despite the hourly charts looking so grim. I would have preferred to get here with a few more rallies in between, perhaps a “slower” descent. I didn’t easily anticipate such a panicky rush-to-the exits, but that’s what we got. That said, now that everyone’s left, we should be close to a big turn.


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