Excepting July 2006 to February 2007, the SPX and other broadly-based US stock indexes had a "heavy" or corrective feel and profile since March 2004. Chart analysis and sentiment analysis confirm that. The movement up from March 2003 to March 2004 was definitely A bullish impulse wave which was not continued thereafter.
I have borrowed my Elliott Wave approach from Elliott, Frost and Prechter, and from Neely. Each of the successors to Elliott has stressed a different aspect of Elliott's work: Frost and Prechter favor the simple 12345-abc with basic waves, and Neely favors complex waves mostly consisting of triangles. I use some of each, all of which is seen in Elliott's own works.
From March 2004 to July 2007 the modest rise consisted of back and forth movements suggesting an ascending triangle. For a long time I thought that the triangle started from the red 1 in March 2004 and ended in July 2006. That is still a viable pattern with the red 1 changed to red A and the black d to red B. That would make A to B into a running B wave triangle. However, a running B wave implies a lot more followup power than we saw thereafter. SPX went up ~374 points from the March 2003 low to March 2004, but from July 2006 low to July 2007 high SPX only gained ~357 points. So the power projection failed to validate that move as a second impulse wave, or red wave C.
Given my assumptions and method, I think it makes more sense to consider that last move from black d to black e as a diagonal or terminal triangle which ended at the November 2007 highs. This is not a Glenn Neely count, but I see the whole move from August 2004 to November 2007 as a "bow tie-shaped" triangle irregular B wave whose end was above the end of red wave 1.
From the November high to the March 2008 low was clearly an impulse wave down with the five waves being easily discernible even on a weekly chart. Thus a-b-c equals the wave 2 correction of wave 1 of 2003-2004. In nominal terms wave 2 ended ~20% higher than wave 1.
But if you multiply the 2003 low and the 2007 low by the US Dollar Index prices of those two low price dates, wave 2 last week was only 10% above the 2003 low. At the 2007 high, the same "real" increase was 60% from March 2003. The annualized "real gain" to March 2008 was only 2.16% as compared to >16% at the 2007 high! October 2007 to March 2008: that's a bear market indeed.
The black numbers in parentheses are the 2CS bearish sentimeter readings at the chart label points. 2CS is the five day running total of the daily CBOE VXO times the daily CBOE P/C ratio. Bearishness was very low at the red wave 1 high, lower than at any time during the bear market from 2000 to 2003. In fact bearishness was lower than at any point in the bull market after 1996. For me this confirmed that it had been a bullish impulse move in 2003-2004.
The 2CS bearish sentiment at the 2007 high points was greater than in 2004 and similar to high index price points in the late 1990's. At the November 2007 high, bearishness was already over 100 and went to 201 last week: more bearishness than at the 2003 low. For me Elliott Wave labels, the annualized real return of just 2.36% since the 2003 low, and the 2CS of bearishness all support my impression that wave 2 may be over. Nevertheless, in the pursuit of a conservative approach to retirement investing, which I live on, I will make no significant changes until I see if my "guess" is correct.
I'll be away for about ten days, so I'll say a few words on gold and commodities. Just as in 1987, gold stocks started getting sold when "generic" stocks started getting sold in October 2007. If you look at a chart of the XAU gold stocks index divided by gold bullion, you'll see that it peaked in October while bullion itself didn't peak until last week. This is due to margin calls in stocks which forces many people to sell everything, the good and the bad stocks. In 1987 gold held up for six weeks after the stocks market and gold stocks crashed.
Gold and commodities normally consolidate for quite a while before making their next move up. I believe that we are in a long term inflationary wave with ten to fifteen more years to run, as opposed to 1987 when we were not even half way through a long bear market in commodities. If I am correct, the stock market will start up again now. Commodities and gold will lag until the economy shows signs of re-heating, as it will do.
As I've mentioned, I had lightened up on metals stocks last year but I did NOT sell any gold bullion then or now. My commodity funds are 100% backed by US Treasury TIP's or Tbills to generate income, and are unleveraged. The natural gas stocks are owned exclusively for their high dividend yields. Natural gas futures were actually up on Thursday, but margin call selling knocked the trusts down. I added a bit and hope to add more later. Natural gas was a laggard so far in the commodity bull market, but it should outperform as new gas pipelines and imported LNG push US gas prices up to world prices over the next 1-5 years.
Even though the "real" US dollar-adjusted SPX lost 31% of its value from October to March, a diverse portfolio of cash, bonds, stocks, gold and commodities is ahead 2.2% in the same period, and it is still positive year to date. Not a brilliant return, but for a retirement program during great market turbulence, I'll take it!
The key to investment survival lately has been wide diversification: all kinds of bonds, generic stocks and inflation stocks, commodities, gold/currencies, cash. Almost of the funds and stocks I have discussed here I own and am holding.
The problem right now in prognosticating, as opposed to just surviving, is that WE DON'T KNOW. Normally, technical market analysis, sentiment analysis, and astute economic analysis are extremely important. In a financial crisis when banks don't trust each other enough to cross-lend overnight, none of the "usual" matters. We've seen the dramatic intra-day moves in many asset classses that clearly are due to massive liquidations of hedge funds and other large investors. Banks are calling in loans in finance far more than in housing. "Sorry Mr Z but your $2 billion loan we made to you which you leveraged up 15 times in mortgages will NOT be rolled over today. Sell and/or die. Have a nice day."
If there are twenty more Bear Stearns lined up to fail and bail, and insiders know that but we don't, all the technical and sentiment and economic analysis in the world won't give us insights on how to capitalize on it. It's important to understand how the FED works and why. It's important to know about the "rich man's panic" 0f 1907 and about 1987. This is not about a normal recession which we may or may not yet actually be in. If it's beyond us to grasp it, then we just have to sit tight and not do stupid things which could make it worse. Those who are done in in this crisis are having to sell both their bad stuff and their good stuff, more or less at the same time. That's why it's so volatile.
If you had or have a decent and diversified portfolio, you might be better off doing nothing rather than selling the wrong thing or selling everything. Some times it's better to lose ten percent and have it come back rather than to sell out everything and not come back. This is just my opinion, and I work only for myself. I'm still ahead on the year a quite modest amount, even after this brutal day today. I consider that a major victory!
A most notable quote of Ed Seykota, pioneer trend follower and specialist in trade control, comes from Jack Schwager's "Market Wizards". Schwager asked Seykota:
"What are your thoughts about using fundamental analysis as an input in trading?"
Seykota made this now famous reply:
"Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them "funnymentals." However, if you catch on early, before others believe, then you might have valuable "surprise-a-mentals."
My understanding of this was then and is now that the daily news or even weekend reviews that we are inundated with is totally worthless. If reporters know and are telling you something, it's been known for a while and already acted upon. I rarely watch TV except for sports and weather which can be "real " news. And I never watch TV market programs. Kill the TV used to be the motto of thinking people, and it's a good one. Keep your mind clear and not distracted or disturbed by bad news which is 95% of what's reported.
Seykota's second sentence gets less attention and respect, but is of equal importance: gaining some insight into future moves ahead of the crowd. If we have some general idea about where markets are going over the next few years, and WHY, we might have a valuable "surprise-a-mental".
In the late 1990's when I was buying gold, chat site cyber-friends (and enemies) used to tease or scold me for being so stupid. The "surprise-a-mental" I had was knowledge of the Economic Long Wave Cycle of approximately 50 years which was close in time to making a low. Obviously I couldn't tell anyone or myself the day, month or even precisely the year, but I was pretty sure it would be between 1998 and 2003 on the schedule it had been on since the late 18th century, and likely long before. So buying gold gradually on weakness and ahead of the crowd was a good idea.
Also buying things exposed to China was a good idea since they had a lot of people to "demand supply". I bought my first China fund in 1996 and a few nndividual Hong Kong stocks. That turned out to be way too early, and 1997 was not kind to them. But I wasn't overloaded or leveraged in either category, so I could hold and wait.
If one uses technical analysis, including chart analysis and rocket science indicators, and sentiment, with the Long Wave as a "surprise-a-mental" backdrop, and then ignore the noise of news and exercise patience, one can make a lot of money like Ed Seykota who doesn't even, or didn't then at least, have a qu0te screen on his desk.
So I decided last night to try to forget the news, which is uniformly horrid, and just look at a few very simple technical lines and numbers on charts of the SP500. I looked to see if there was any connection between the big SP500 crashes of the past 2o years: 1987, 200-2003, and 2007-2008.
I can imagine some readers are thinking, "Tom, I can see 1987 and 2000-2003 being on the crash chart, but 2007-2008 doesn't make the cut even though it took 20% off many stock indexes". Good point, but let me show a sentiment chart that makes a good case for 2007-2008 as "crash-eligible". this comes from cyber-friend, Kirk Lindstrom (click on chart for larger image):
The ten week AAII bulls minus bears indicator is lower than it has been at any time since 1991 during the Savings & Loan crisis, which this one resembles in so many ways. Investors are more bearish than they were at the 2002-2003 lows! So I do think the drop into January, and even since, qualifies as a crash, at least psychologically.
Here is a log chart of SP500 futures which draws a line from the 1987 low through the 2002-2003 lows, and what do you know? SP500 touched it on January 22, 2008. Granted that this might not convince a judge in a law court, but it is is quite suggestive when both a sentiment chart shows massive bearishness at a low and a percent line on a log chart of stocks connects the three biggest sentiment crashes of the past 20 years.
Last I'll show something more tenuous but which could indicate what has been going on since the market made a low on January 22. This is daily chart of SP500 futures again with the numbers and alphabet letters us in Elliott Wave counting. It fits (but isn't proved) with the moves from January 22 being a bullish first wave up and a corrective wave down. No proof. Just suggestive. But if you forget the news, it might just be that the SP500 is going up again. Stay tuned to the chart, not the news.
Previously I had not counted gold bullion into the total of all investment accounts, but it makes sense to do so. As of February 29, 2008, the accounts consist of the following asset allocations: 1. cash 19.3% (money market funds and the cash balances of mutual funds). 2. Bonds 50.9% (includes the bond holdings of VWIAX, RPSIX, LSBDX, PCRIX and HSTRX and short term municipal bond funds). 3. stocks 19.9% (includes the blue chip stock portions of VWIAX and RPSIX, the metals and energy stock holdings of HSTRX and VGPMX and VGENX, plus all the oil and gas royalty trusts, plus PCRIX and GCC) 4. gold (bullion) 9.9%.
Two thirds of the stocks should be considered "inflation hedges" plus the gold, together totaling 23% of the total portfolio assets. That's a little high, and I may cut back a bit as the inflation hedges are more volatile than the rest and have had a big run. However, I'm "bullish" on inflation for the long run, so this will only be a minor "trim".
Year to date this portfolio, including dividends, is up 3.26% which, if continued, would give 19.56% for the year. I'm not counting on that. The Vanguard Admiral Short Term Bond index (VBIRX), with a duration of 2.5% (close to mine), is up 2.99% year to date. The Vanguard Admiral SP500 Fund (VFIAX) is down 9.06% year to date. Gold is up 16% year to date. Gold is thus responsible for 1.6% of my total gains and therefore 50% of my total gains. This is a good hedge. But if we look at the trade-weighted US Dollar Index, it is down 3.9% on the year. So in effect I have lost 0.64% in purchasing power year to date. Hmmmmmmmmm...maybe I'll keep all the hedges after all.