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Ok, so let’s review what’s giving me anxiety for the moment.
The question for me is:
And the answer to that matters and makes all the difference. I have been interested in the interpretation that places the technical high at the early December high, which would give us a flat from that high, giving us a 1-2 in intermediate (orange) degree. I liked that count because of things like strength in high yield, sentiment, etc., etc.—all the things I’ve been complaining about lately.
Now, if the “orange 1-2 is done count” is right, we should move up powerfully in a 3rd wave, and we are moving up, but
There’s always a but. I like that we’re moving up, and I was positioned for that. But, I know we need to enter a central third wave at some point and I don’t see that yet. I also know that if we’re going to keep the 200-day, we will probably need to gap over it, and all of that was set up nicely this week with the economic data and we stalled here instead.
And I also don’t like it when I can’t see a more obvious 1-2, and I wanted that, I wanted a nice a-b-c in minuette (orange) degree for blue 2, like this:
In this weekend’s article, I want to discuss the very long-term picture, and what I believe are the two basic options for where we may be at within that picture.
When we account for the phenomena we see in the markets today, it is in our nature to look to history for some kind of guide to help us through the present. And given the nature and length of the decline in equities this year, it is natural to look to prior bear markets to help us to understand what this one might be like. Most of us have lived through and experienced the dot-com bust or the GFC (or both). And so those are our two most natural guides at hand.
And yet, the macro-economic forces today aren’t necessarily a good match for either of those two times. I had, for instance, at one point looked to the dot-com bust as a guide, but I’m not so convinced now as I had been. We certainly had a tech bubble inflating in the present day. But, when you look at almost all of the growth stocks that had enormous run-ups (ARKK, etc.), they already look now like the dot-com bust stocks looked at the end of that bear market. Totally gutted. And yet the major U.S. Indices remain relatively strong by comparison.
And we have inflation. And what do we do with that? I am inclined to think that Russell Napier understands the situation well (you may read an important interview he recently gave here). He predicts that governments are going to use inflation as a vehicle to solve the debt crisis. If he is right, this is a process that may take quite some time. A period of tightening and weakening policy, allowing sticky inflation to persist for maybe even 10-15 years until metrics such as debt-GDP normalize.
In the past, after the enormous debts from World War II were accrued, and additional expenditures of the Cold War mounted, those debts were normalized in the 60s and 70s through waves of inflation. And, the great irony today of course is that while Jerome Powell tells us the Fed aims to avoid those very mistakes, that may actually be exactly what he is intending to replicate. And if it’s not what he intends, it may then be what the US Treasury intends, and in the event of conflict, that is a fight the Fed will lose, as the Sovereign is all powerful, and among them, the US Sovereign is the most powerful among the global Sovereigns. Not Powell (nor his successors) can resist the will of the Treasury in the end. And neither will we be able to. And it is not a partisan issue. It’s not “those damned Democrats” or “those damned Republicans.” Both will aim to solve the problem in roughly the same way.
Now, given all of that, which I find persuasive, what in the hell could that even look like on the S&P 500? A somewhat carefully managed period of tightening and loosening policy is probably going to look like a huge consolidation. Fortunately for us, consolidations like this are often large 3-swing moves typically involving one “nest,” giving them the look of a 5-swing move: down-up-down-up-down, maybe even triangle-like (A-E). It could roughly resemble this:
Read more “Pour Yourself a Drink: It’s Time for the Weekend Review”
Beginning from here, after I discovered what I thought was an ending diagonal on Apple, I began to assess whether a full impulse wave had also completed on the S&P. And if so, that would have been some kind of “1,” and we should expect a “2.” Wave “twos” are typically sharp retracements (whereas wave “fours” are typically flat, and sideways). This is not always true by any stretch, but it is common. Given that, and the fact that we lost our major trend line without a gap, I assigned a resonable probability of a sharp “2” to come.
As the week unfolded, things looked good. I want to review that for a moment.
First, the ending diagonal looked lovely, and malicious: