Important Market Downturn today? Feb. 18, 2010

Short Term Forecast

A number of signals are suggesting that the recent market rally from the lows on February 5, 2010 for the TSX Composite and SP500 Indexes may have ended and the downtrend that began at the peak of the 10 month rally off the March 2009 lows will continue.

Dow Jones Ind Aver...February 12, 2010

The DJIA appears to be doing the same thing as the TSX Composite Index north of the US/Can boarder. A well defined narrowing triangle pattern followed by a break out to the downside.

If I'm reading this correctly...the buy and holders on both sides of the US/Canada border are in for a very unwelcome surprise over the next number of months.

I won't speculate on the ultimate bear low or how long it might take to get there. Just that I'm expecting an ultimate bear low somewhere below the March lows.

TSX Composite Index February 1, 2010

An update on my last post.

The TSX index continues to look like the 10 month rally ended on January 11 at 12,070. The US SP500 is similar. The details of the waves since the possible end of the rally are consistent with what one expects following an important downturn. Now...the market can always do something different but so far it continues to look like the longer term trend has changed from up to down.

World Stock Markets Looking Weak January 28, 2010

I continue to study the market charts looking for more clues as to what is going on. My main tool is the Elliott Wave Principle (EWP). I also use other forms of Technical Analysis. I do not ignore the fundamentals.

The results of my review continue to indicated that the bear market will most likely continue below the March 2009 lows. The index charts for Canada, the US and Japan are all very similar and tell me the same story.

I can't say how much lower the stock markets are likely to go but the situation continues to have the potential to develop into another 1929-32 bear market degree of severity. The loss during the 1929 bear market was about 89 percent. For comparison, the current bear market was closer to a 60 percent loss at the March 2009 lows.

I only refer to the 1929 bear market to give people something for easy comparison. My analysis is based on a great deal more data than one particular bear market. I successfully recognized the approach of the bull market peak using the EWP and this was not the first important market turn that the EWP allowed me to recognize.

If we do see a 1929 type scenario, investors who currently subscribe to the 'buy and hold for the long term' are risking holding shares or mutual funds that may take 25 years or more to recover back up to the bull market peak (2008 for Canada and 2007 for the US).

A few comments on the economic situation and human psychology

The news from official reports (economists/government etc.) are anything but rosy at this time. Governments continue to be worried. And, many investors recently burnt by the unexpected bear market slide down to the March 2009 market lows remain nervous at this time. Many continue to be sitting in a relative loss position.

I speculate that any relatively fast downward market moves at this time may lead to a panic that will be comparable to, or worse than, what we saw leading down to the March 2009 lows. This is what occurred in the 1929 bear market. Believe it or not, this is normal market behavior under the EWP. Bear markets frequently exhibit three distinct legs, one down, one up and one final down move. This was the case in 1929. After a very strong rally of about 50 percent on the way down, the floor fell out of the market for the second time taking it to the ultimate 89 % loss bottom.

With us humans we tend to think and act with a herd psychology, especially when we are afraid of something. If a lion grabs a Gazzel at a water hole the rest of the herd panics and runs for safety. People act in a similar fashion in the stock market.

I wish I had better news.

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.

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%).

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.

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.