S&P 500 Index, Elliott Wave Count

I am posting one possible Elliott Wave Count for the SP500. To keep things simple I have labelled two cycles with black being the higher one and red being the lower one. If this wave count is correct, the index will continue to make new lows after the current rally has ended. The green line would be the extreme upper limit of the current rally. The irregular wave two would explain the apparent seven waves in the leg down from early February to early March. The EWP only allows one to see "possibilities" and as always this is only one of the possibilites at this time.

S&P 500 Index...a 580 % rate of return

During a good year in a strong bull market one might see a 20 percent net gain. As one lengthens the period of time, the percentage gain per year drops. For a good 5 year period the average year may be closer to 15 percent per year, compounded annually.

Taking an even longer historic view, if one goes back to the 1930s time period for the Dow Jones Industrial Average, the annual equivalent rate of return over about 80 years is in-the-order-of 3 percent to 6 percent per year. The 3-6 % spread comes from using peaks or lows at both ends. These numbers suggest that the longer one is invested, the more likely they are to see lower returns of rate.

At the other end of the rate spectrum, consider the market rally over the last 10 calendar days. The media has been focusing on how the markets have risen for the last 5 trading days. This rally has produced a very impressive short-term rate of return.

The SP500 Index rose from a low of 667 on March 6 to a high today of 774. This was a point gain of 107 points over the starting level of 667. A total gain of 16 percent over 10 calendar days. This is equivalent to an annual gain of 584 percent per day. The two ends of this spectrum are 3 percent and 580 percent. Interesting numbers here.

Based on nothing more than the 500 % + unsustainable rate of return recently we should not be surprised to see the markets drop significantly over the next few days.

March 6th SP500 Rally Update

Following up on my post of March 6th , I am posting today's chart for the S&P 500 Index. The rally that began at that time continues to climb.
For anyone familar with statistical probability, ask yourself what are the odds that someone could have predicted this rally, on the day it began, if the stock market is really just a random walk. I know it is not an impossibility with a random walk but keep in mind here that I do not make a lot of these forecasts. I am not a roulette wheel being spun 7 days per week for years on end. Its quite a different situation. Very few trials here.

As I monitor this rally and ponder my trading decisions I am now trying to see where this rally might end, in terms of it's upper extreme limit. Strong rallies like this one are always temporary, at least in the short-term.

The end of a bear rally, if I am correct in this longer-term expectation, is always harder to call than the start of the rally. My crystal ball is not that clear. A degree of uncertainty is something one must always live with when forecasting the market. The degree of uncertainty varies over time.

There are several possible upper limits, the closest one being near 810. As always, the market will decide if this limit is the most appropriate or not. It all depends upon how much bullishness remains out there in stock market land.

Financial Advisors are Learning

I am starting to see signs of the rosy picture painted by those who give financial advice change. A few years ago the typical story was ‘invest money in the stock market if you don’t need it for 5-7 years’. Sound familiar? Now, more and more, I hear them saying things like ‘if you have a time horizon of a few decades’ etc.

The undeniable market history, coupled with the severity of the current bear market, is forcing the financial advisors closer and closer to seeing how the market really works. I expect a lot of them are reviewing and rethinking what they were taught in financial advisor seminars etc. I also expect that the majority of them are also taking a big hit on their personal finances.

It will be interesting to see what their literature says a few years from now.

Predicting the Random Walk?

In my post on Friday, March 6th I discussed the possibility of the start of a rally for the SP500 Index. The upward turn at level 667 did develop into a relatively significant rally. I have circled the rally on the updated chart. It will be interesting to monitor to see where the market goes from here.

The success of this prediction may be viewed as possible evidence that the stock market is not just a random walk. That does not mean that there is no randomness in the stock market.

A Random Walk and Black Swans

Statistical experts say that stock price fluctuation over time is a random walk. If that is true , then why does the market increase in value over time?

I calculated the annual equivalent compound return for the Dow Jones Industrial Average from the low of 41 in 1932 (after the 1929 crash) to the most recent low of 6440 in 2009. It comes to about 6.75 percent compounded over 77 years. In other words, $1 would have appeared to have increased to $157 dollars.

The starting point and ending point of these types of calculations will make a relatively large difference. For example, if I use the 1992 peak of 381 and compare it to the 6,440 low in 2009 I get a an apparent annual compound return of only 3.75 percent. Yikes...put my money in saving bonds!

However, we should view this apparent increase as "an illusion" due to the effects of inflation over the last 80 years. We know that $1 in 1929 or 1932 bought a lot more "things" than $1 buys today in 2009.

If we subtract inflation from the stock market long term increase then prices may not have really gone up at all.

Another thing that occurs with a stock index is that stocks that drop in price below a certain minimum threshold value are periodically culled from the index and replaced with the lastest hot stocks. That's a little like dead people in a study group being placed with new live ones. This factor may also contribute to the apparent increase in the index over time. The real market increase may be lower than what the indexes suggest. The index was never designed to model the growth in the stock market.

With a random walk, we can say that if one waits long enough the true value of the DJIA can be expected to return to the starting point from time to time.

The current bear market may be just that...a "run" of values that happens by chance to be moving the markets back closer to the starting point.

And, Black Swans may just be the market randomly heading back to the starting point as should be expected with a random walk.

The problem I have with all of this is that I have called so many turns that even if the numbers, on their own, fit well into a statistical distribution, one having the appearance of a random walk, I have seen too much evidence to the contrary to believe it.

However, I can understand how others with less knowledge could come to that conclusion. That conclusion on their part would be perfectly logical. I guess, in a sense, good market predictions to those people would be just another Black Swan.

Immature Bald Eagle

For a change of pace here is a photo I recently received from friends of ours. It is a photo of an immature Bald Eagle on the ocean shoreline on the east side of Vancouver Island. I presume it was taken with a telephoto lens. The younger birds don't have the characteristic white head until they are a few years old. The younger ones are also significantly larger than the older ones. This one already has "the stern look", the large curved beak and the large yellow feet.

SP500 Possible Temporary Bottom Today

Every so often I recognize what appears to be a very likely turning point in an index. The SP500 may well have made one of those turns today (March 6) at the low of 666.79. This is based in part on my Elliott Wave Count. If the rally does occur I see it as only another pause in a continued downturn.

The interesting thing about this is that my analysis allows me to see "the possibility" of a relatively important market turn as it occurs. Only Elliott allows one to see this sort of thing.

Time will tell if the market has started a sideways or rally pattern. The market always has the option of going deeper still before it makes the next rally. In any event it appears to be due for a somewhat larger rally at this time.

Another Bull Trap Snaps Shut

Over the last couple of days a rally of about 100 points occurred on the SP500 US stock index. This little rally naturally had people wondering if this was going to be a large rally or perhaps the end of the bear market. The rationale being...if the market is down 50 percent surely it can't go much lower. I'm sure that there people thinking/hoping the same thing when the 1929 stock market decline was at a 50 percent loss point. It eventually went to -89 %.

This morning that little 2 day bull trap closed and the SP500 made a new low.

It is also worth noting that another example of a bull trap closing occurred today on the Canadian side of the boarder. Canadian National Railways Company (CNR on TSX exchange) has finished a sideways move that began back on November 21. At that time the low was $38.9. The price has dropped to $38.5 so far today.

These "technical events" are measurable scientific evidence that the bear market is alive and well and that the best bet these days is for lower lows.

These breakouts to new lows do not tell us where and when the bear bottom will occur but they do warn us that the bottom will occur somewhere in the future at some lower level.

Bear Market Bottom

No I'm not seeing any signs of a bottom yet. However, I thought I would discuss it a little to give readers a feel for where I am on this important question.

The stock markets in North America have recently started to fall below what can be described as a more or less sideways price move that began in the October to November 2008 time frame. Because the markets have now decided to go lower any hope of a bottom in that area has been lost.

The technical door has now been opened to "the possibility" of a much deeper bear market. By worse case I mean something as deep, and yes, perhaps even a little deeper than the 1929 crash (-89 %). At this time, for me at least this is an academic question. I will take it as it comes and try to profit from it. For now "I'm betting" on lower lows for the next while.

Believe it or not, another 1929 type event would be "within normal market technical boundaries".

Government officials and so called experts like Warren Buffet don't really understand how the stock markets work. If Warren really understood he would not be in such a loss position today. The problem is not subprime mortgages or foolish investments by banks or insurance companies. And even the crooks don't really count on a larger scale. These are only the "symptoms" of the underlying, broader problem.

The underlying fundamental problem is that "we" (in the broadest sense) have lived beyond our means for decades. Extremes include expensive winter holidays by working class people, mini-castle homes, two cars and replacing "things" because we just wanted something new. Paying ridiculous prices for stock issues. And, businesses that can only function with a bank loan. And I will throw in...believing in the flawed thesis of the buy and hold forever approach to investing.

In short....western society (and perhaps the world) have/had a spending problem. And, everyone has run out of money and credit. This is not a "confidence" problem. If a bum on the street has great confidence but no money or credit he still can't afford a taxi ride.

I'm not expecting the US and Canadian stimulus spending plans to turn things around. If someone is bankrupt giving them cash or a loan they can't afford only stalls off the inevitable a little longer.

With respect to the stock market, I see many stocks on both sides of the Canada/US border that still have "the potential" to continue much lower and take the indexes with them.

The chart shows how the TSX Composite Index has recently broken below its November 2008 low.

Three Main US Canaries Are All On The Bottom of the Bird Cage

Its now official, the S&P 500, DJIA and DJTA Indexes have all broken below their November 21, 2008 lows. A clear Dow Theory confirmation of a continued US Bear Market, at least for awhile longer. The Nasdaq has yet to do so but I consider it a secondary index.

The Canadian TSX Composite Index is teetering on the edge of doing the same thing. On February 24th it went below its November low during mid-day trading. So there is little hope that Canada will avoid more downside as well.

We should expect the bear market to retrace something more than the ~50 percent loss to date. This bear market is now officially the second largest market loss since 1929-1932 (-89%).

Welcome Back to 1997

The Juggling Dynamite blog brought this movie clip to my attention. It is interesting to watch at this time now that the stock markets are back to 1997 levels. If we don't learn from history we are...

Apple Computer Stock...The Reluctant Fruit

I posted a chart for Apple back in October 2008. At that time the chart was telling me that Apple stock could easily see a price of $40 or lower. That would be about $50 lower than the current price. I have no reason to change that view. However, Apple stock is still hanging in there around $100.

All the major North American stock indexes have either broken below their November lows or they are within a hair's breadth of doing so. The Nasdaq is the index that has the farthest to drop before that happens. It makes me wonder why.

Apple Computer's reluctance to join the next stage of the bear market appears to be one of the reasons for the Nasdaq Index having the farthest to fall. Even Microsoft has had the decency to join the bear party and break it's Nov. low. And, Microsoft has recently warned that their business will suffer during the bear market. Make perfect business sense to me...new computers and the latest software are, in many cases, a luxury that individuals and businesses can postpone to save money. I would guess that Apple Computer will also see lower earnings with the drop in PC sales.

I still think the Apple will fall and we will see a large drop in the price. Based on what the rest of the market has done recently I don't expect we have long to wait before Apple breaks its November low. If that happens, as the Apple falls it will help bring the Nasdaq and other indexes to lower levels.

Dow Trend Confirmation Signals

With respect to the severity of the current bear market, I agree with anyone who thinks that a much deeper bear market, like the one in 1929 (-89 %) is just one possibility.

However, there is another worse case scenario we should keep in mind. It is the possibility of a long duration, more or less sideways bear market, similar to the 1968 to 1983 time period. A lump sum held in the stock market through that entire 15 year period would have earned 0 percent in capital gains.

In fact, we may already be in one of those sideways market periods. It may have begun back in 2000. More so for the US than in Canada. Many stocks started their bear in 2000. Those stocks have already been in a bear market for the last 9 years.

In the short term, I continue to see a high probability of at least some additional downside below the November lows for all N.A. indexes. Likely world wide.

My expectation is based in part on the fact that the DJIA, the DJTA and the TSX Capped Financials and the TSX 60 (as of today) Indexes have all broken below their November lows. In short, we have an abundance of evidence to demonstrate the Dow Theory Trend Continuation signal has been given loud and clear.

Some people continue to hope for a large bear rally at this time. Unfortunately I see little opportunity for this to happen. In fact, a large bear rally may not even happen during this bear market if it goes much deeper. That pattern is only one possible bear scenario...one leg down one leg up then a final leg down.

If a bear rally does occur, I see it starting at some lower level, not starting from the Nov. lows, and not now.

Dow Confirmation Close at Hand

I mentioned earlier that the Dow Transports had broken below its November low. I now see that the sister index, the DJ Industrial Average is very close to also breaking below its Nov. low. It could happen tomorrow. If this occurs...it will be a textbook case of Dow Theory confirming a continuation of the downtrend below the November lows.

The S&P 500 and the Nasdaq are still some distance above their Nov. lows but the number of canaries is growing. Since the Canadian TSX Capped Financials Index has already gone below its Nov. low the other Canadian Indexes will most likely follow as well.

A Dow Bear Trend Continuation Confirmation may be newsworthy enough to make the headlines.

This is additional technical evidence to support my expectation of the November lows being broken for all indexes.

Berkshire Hathaway is down by 43%

Interesting. On a percentage basis, my portfolio is officially much better off than Warren's. I haven't lost a dime since the crash began. I'm a little ahead.

Berkshire Hathaway is down 43 % since the peak. I guess they subscribe to the buy and hold thesis and the fund tracks the market closely.

Unfortunately there may be more bad news for Warren. The chart suggests that Berkshire Hathaway Inc (NYSE) may just be starting the decline. It has broken below a 9 year trendline on high volume. That is not a good sign.

The real test will be to see how I do compared to Warren after the bear is over and the next bull is well under way.

Markets Going Down This Morning

Further to my post about the possibility of General Motors going into bankruptcy and the markets waiting for "an excuse" to go lower.

It looks like it may have started this am. The charts indicated that the stage had been set for "this possibility". As always, this was just one possibility for the markets.

Buy and Hold Investing

I have been reviewing the credibility of the case for the Buy and Hold for the Long Term approach to investing.

As I understand it, the thesis goes something like this. No one can consistently forecast the stock market so it can only be viewed as a series of random events. The exception is that the market history supports the view that the markets always recover from a bear market. Therefore, if one buys "good stocks" and holds for the long-term, then the investor will eventually receive a good return on the market investments. The trick is to ignore market flucuations no matter how deep or how prolonged they may be.

This investment philosophy can be combined with dollar-cost-averaging, which is also based on the belief that it is impossible to time the market. One buys market equities/funds, say every month with a fixed sum. In that way...as the prices fluctuate one buys more at lower prices and less at higher values.

There is no question, as long the country remains in business the index will come back eventually and surpass the pre-bear high. And, dollar-cost-averaging ensures that for prolonged bear markets one will be buying some shares at lower prices.

The whole think hinges, in part, on not picking stocks that never recover from the bear market and unfortunately that does happen. An index fund will eliminate that risk. But there is another little known risk. Unfortunately, the Buy and Hold approach only looks attractive if one "models it" using carefully selected portions of stock market history. In other words with good "market timing".

There have been periods of time when the market would have tested the patience of anyone subscribing to the buy and hold approach. The periods of market history I refer to are the 1929-1954 and the 1968 to 1982 time periods. The markets, as defined by the DIA Index, took 25 years to recover after the 1929 crash. And, the ~1968 to 1982 time period although a less severe bear in terms of depth (-45 % compared to the -89 % loss of 1929) but it was a time period where the market went sideways for about 15 years.

It is easy to show that for these two time periods, a lump sum, that was invested at the pre-bear peak, would have performed much better had it been in a nominal rate GIC. The green lines on the graph of the DJIA show a few recovery times, including the two mentioned above.

"GM considering Chapter 11 filing"

This headline may be just the excuse the stock markets have been waiting for. Even the suggestion of this has the potential to create a run for the exit in any related stock.

The chart for GM shows that, at least for this stock, the bear market actually started at the burst of the dot.com bubble in 2000. Some other stocks also started their decline back in 2000.

This news also comes at a time when the markets are technically poised so that they have "the potential" to fall quite quickly, at least in the short term. If that were to happen then this could create sufficient downward momentum for all indexes to break below their Nov. lows. Some people view this low as a technical level of support. A drop below the Nov. lows would be viewed as the next important step in the bear market. Some who bought since Nov. thinking a big rally was at hand or the end of the bear had been seen may sell to cut their losses.

This is just speculation on my part but it is fun to guess which way "the crowd" will run.

TD Toronto-Dominion Bank (TSX)

TD Bank continues in the bear trend. It recently broke below the November low, as did Royal Bank and The Bank of Nova Scotia. The Bank of Montreal has not done so yet but it may be a safe bet it will.

Too soon to buy Canadian Bank stocks. The P/Es are still in the 8-10 range.

SBUX Starbucks Corp

I see that Starbucks will be selling an instant brand of their coffee. Not sure if that will make much of a difference for them.

The stock price looks like it will continue lower, below the Nov. low of $7. A nice example of how stocks move in trends. As long as the price stays to the left of the trendline, the bear trend is still in effect.

CNR Canadian National Railway Stock...lower lows expected Feb. 11, 2009

I believe that earlier I mentioned that the US DJTA Index, the Transports, had already broken below its November low. This lead me to look on the Canadian side of the border to see if there was a Canadian Stock that one might expect to see doing the same thing.

Sure enough, CNR was following the same playbook. CNR had a nice 14 year bull market, running up from about $5 to a high near $60. The trend has now changed from an upward bull market trend to a downward bear market trend. A simple 4 year trend is shown. This action by CNR is totally consistent with everything else going on these days.

So far the bear trend for CNR has retraced about 35 percent of the bull. Don't be surprised to see it hit ~$26 or lower before this bear market is over. The P/E = 11, still too high for the bottom of a severe bear market.

TSX Capped Financials Index...the Canadian Canary in the Coal Mine?

The TSX Capped Financials Index, the one that includes all the Canadian banks like Royal Bank etc. has recently broken below it's November low. It has only done so "by a hair" but that is significant from a technical point of view. It all goes back to Elliott and the limit of the second wave. In addition the wave pattern is consistent with just a pause in a continued downtrend.

I know a lot of people have their hopes up for an end to the bear at the November lows, or at least a large temporary bear rally at this time. However, if anything, I continue to see more and more data predicting a near term collapse of markets to lower levels.

By near term I mean it could happen this week or a few months from now. This sideways pattern could continue to stall out the markets for some time to come. The timing of these things is always the biggest part of the mystery.

Wish I had better news.

DJTA Index...Canary in the Coal Mine?

The DJTA Index...broke below its November low this morning. This may turn out to be a significant early warning sign for the US - and perhaps other world wide stock markets. This event will likely make the daily news soon.

After some of the large cap components like UPS and FDX recently broke new lows, the Dow Transport Index broke below it's November low this morning. This appears to eliminate any possibility of an EWP wave two correction as part of a larger rally that many have hoped would occur at this time.

I also see similar wave and volume patterns in the other US and Canadian Indexes, suggesting that they will "most likely" follow on the heels of the DJTA Index. The volume patterns for the TSX Comp and Nasdaq are not as well defined as the others but it's there as well.

The DJTA Index may turn out to be this months canary in the coal mine. If the DJIA Index also breaks below it's November low then this we create the classic and time proven Dow confirmation of a continuation of the current trend. The current trend is a bear market downward trend. In other words, a technical analysis confirmation that the bear has not ended.

From a practical market monitoring point of view this event also suggests that the trendlines can now be adjusted as shown. I have shown them for UPS and the Dow Transport Index. The most exposed point of the recent sideways move now becomes the last anchor point for the most current trendline shown here. This new boundary becomes our trendline going forward.