TSX Composite Index Short-Term Expectation...February 11, 2010

Every once in a while I stick my neck out and make a short-term market forecast. The TSX Composite Index has a short-term wave pattern that has the earmarks of an index that will be making new short-term lows. The rising, so far, triangle shaped pattern with overlapping waves... suggests that the buyers are losing ground to the sellers. The probabilities favour the index dropping below Friday's low near 11,000.

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.

TSX Composite Index, January 21, 2010

The stock markets may be near an important junction. The one year chart for the TSX Composite Index shows the rally since the March 2009 low. An impressive increase over a relatively short period of time. Without getting into a lot of detail....the circled breakout below the trendline has the potential to turn out to be an important market downturn. Other indexes in the US are at a similar juncture. We could see just a large temporary downturn in a continued uptrend or the bear market may continue to some point below the March 2009 low.

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.