Scary Talk For a Moment: Long-Term Outlook Revision

For this post, it will be helpful if you recall this post here. If you’re new, it may be worth looking at. Most importantly, reexamine (or freshly examine if you’re new) the second-to-last chart.

That whole idea was predicated on the idea that we could have a fairly quick (but largish) correction, after which we would resume the bull market for one more big leg up.

However, I now think that is not so likely.

The biggest reason for that is this: when I look at the weekly charts of things like the Russell 2000, Amazon and many others, what I am often seeing are very large distribution tops. These are not to be trifled with. Look how long they distributed Amazon. Incredible. That’s not the kind of top one would ever expect to see, in which we would have a drop as we have had, only to then run right back to all-time highs and keep going. When you see a distribution like that, they’ve literally gotten rid of practically all of it, and if they get back in, it’s going to be at much, much lower prices a million years from now. They don’t distribute like that, then buy it all back right away.

It will take them a long, long time to re-accumulate it and we haven’t seen anything like that process yet. I’ve posted some other examples of long-term distributions here and on Twitter, and I will list some links so you can review them: Caterpillar (here), Newmont (here), Tesla (here), Gamestop (here), and I am sure there are others, too.

This is making me question my proposed degree of structure that I discussed in the article linked to at the beginning of this article.

And furthermore, the structure we’re in now, reminds me of something that I will get to in a moment, and it all makes more sense to me now using this updated interpretation.


So, a quick review on the S&P 500:

What I have been expecting is a purple “c” wave decline that would bear a price relationship with the purple “a” that was the GFC, like this:

SPX

After which i was expecting one more leg up in the bull market.

But this sort of does not jive well at all with the super-duper long-term distributions I am seeing. And I believe them when I see them. So, not to scare anyone, but I also only just noticed last night that the COVID crash bears a precise relationship with the GFC already. And if that’s so, I may be off by an entire degree of structure, which is bad news for the bulls.

I may need to drag everything to the left, like this:

SPX

Oof.

We may actually already be in that huge red B wave and it’s not going to be fun. But I do think it will be somewhat intelligible, and that gets us to the other thing I discovered when looking very closely again at the 2000-2003 decline.

The structure we’re in right now today is a horrible mess to try to count. And believe it or not, it actually lines up scarily well with the dot-com bust, from a wave pattern view. The beginnings of that major bear market were a total mess. All sloppy and corrective price action, especially at first.

A few features to note about our structure today:

  1. We’ve lived under the 250-day EMA for a while
  2. We’ve come back to retest that EMA from beneath
  3. And this “bottom,” which has been sloppy, has been a 42-day affair

SPX

And in 2000, we saw something similar:

  1. We lived under the 250-day EMA for a while
  2. We came back to retest that EMA from beneath
  3. And that “bottom,” which was also sloppy, was a 41-day affair

SPX

And the whole thing back then counted similarly as we can best count our market today: as an unfolding series of A-B-C’s, nesting and becoming larger as we declined over a two-and-a-half year period.

Given the distribution I believe has been ongoing, and given the stupendously large degree of structure we may be in, this makes a lot of sense to me.

The bad news is that we might be in a hellish market for a very long time (years). The good news is this: we’re not that likely to have a ridiculous crash, though there will be periods that are certainly crash-like. But in the dot-com bust, most of those got bought right back up again. It’s actually somewhat tradable once you get the hang of it.

The other good news is this: in the 2000-2003 decline, the fibs were miracles. And a second miracle was the 250-day EMA. The whole way down, here’s what we did: the first A-B-C fractal had a 1:1 (100%) A-C relationship, after which we came right back to the 250-day EMA. The next decline had a 78.6% A-C relationship, after which we came right back to the 250-day EMA. And the next decline had a 61.8% A-C relationship, after which we came right back to the 250-day EMA. You see? That’s actually fun. If we do anything remotely similar, it’s going to be intelligible and reasonable along the way. We should be able to generate targets, and if we hit them, we know roughly where we’re going to rally to next.

The last good news is this: the GFC was a banking crisis and a harsh recession where a lot of people lost their homes. This kind of market isn’t probably going to be quite like that. It’s very unlikely for us to have a banking crisis here. A recession, yes, likely. Maybe ongoing and chronic-like. But maybe not so harsh. Not as severe. Not like losing a limb, but more like having an illness, something chronic and ongoing for a while. Stagflation-like, as we might expect here given the circumstances.


All of this is thrown out the window if we go shooting up from here. But if we lose 4000, this becomes my only reasonable scenario given the distributions  and degree of structure I think I see.

This could become a long, long, long process and you should prepare yourself with extra doses of patience. Lots of trading opportunities, but no more money printer goes brrr for a while, is my expectation.


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