And Then There Was Wave 5

The leg down has begun it appears. In technical wave parlance, this is wave 5, the last leg of a move down. I won't get into it all, but suffice it to say the waves move within bigger waves which are a part of bigger waves, etc. This one is part of a sizable wave structure. When this leg is done, the big rally I've been talking about is due.

How far down will we go? Hard to say. According to the rules of Elliott Waves, wave 5 only needs to exceed the low of wave 3. Wave 3 was the low set on Nov 21 which was 7449 on the Dow (approx 740 on the S&P). We're at 8000 as of yesterdays close. The estimates I'm seeing by the gurus are anywhere from 6500 -7400 on the Dow. I'm thinking this low will be mild. Time to scare a few people out, but not everyone. Yet.

So, what's new? Well the GDP number released on Friday was actually better than expected. So why no rally? Because it was quickly realized that the first release of GDP (there are 3 of them) didn't contain some crucial information and would have been much worse if it had.

What about the 825 billion dollar stimulus package? Well it's being picked apart finally and people are seeing that the bulk of the money won't be spent within the first 2 years... Huh? That's right, it will barely do any good right now. That and the fact that it's being filled up with so much pork that the reality is, there ain't much stimilus in the package, just the same as usual garbage.

But Scott, what about....???? There isn't much else to try to hang your hat on is there? 100,000 layoffs announced this week alone by companies big enough to make headlines when they announce layoffs. The December unemployment comes out Friday and I'm very afraid of that one. In the Triangle alone the rate hit 7% according to this mornings paper up from 6.1% the month before!!! That's the worst since the early 1970's!!! And it doesn't include the recent announcements by IBM and Nortel!!! If we're at 7% what to you figure the country will be at?????

I do hate that all I tend to report is bad news, but I'm trying to point out that wearing rose colored glasses right now is not the way to be looking at what is going on. I don't want to sound like a broken record of doom and gloom either. I'll be thrilled when things turn around. I want my retirement funds to grow too.

This upcoming rally is going to ease a lot of minds and make people feel much better overall, which I think is good in that we need a break. But... as I keep stating, it won't last and the next move down is going to be worse later this year. We'll continue tracking it here.

One last gloomy thought... January ended up being the worst January in history of the markets, down almost 9%. Remember how happy the talking heads on CNBC were to put 2008 behind us because 2009 was going to be so wonderful? Not a good start, huh?

Economic Data

A lot of earnings out this week and today (Thursday) had some housing data, jobless data and some durable goods data. None of it good. Actually adjustments to prior months was downright ugly. Stocks are down a bit so far today, but still no plummet. Folks are clinging to hope. The big concerns are the forward looking forecasts being made by companies reporting their earnings... if they're willing to make any forecasts at all. Several companies are saying they can't even guess at this point.

The combined S&P500 2009 earnings expectations keep coming down, but the markets keep ignoring it. Based on standard measures, the S&P should be at 600 right now instead of 850. But it'll come.

The gov't is still trying to find new magic tricks. The stimulus package to me is a joke. It won't stimulate much of anything. The Fed announced yesterday all sorts of things they're willing to do if they feel it's necessary. A lot of it is over my head as far as treasuries, bonds, etc.

There's talk about adjusting mortgages and today is an article about incentives for buying new vehicles. http://money.cnn.com/2009/01/23/autos/government_car_incentives/index.htm?postversion=2009012912

The problem is people are scared to death to spend large sums of money due to layoffs etc. Now, here's the problem, it's a giant circle... People afraid of being laid off, therefore they don't spend, the lack of spending slows the economy causing layoffs... Once the cycle starts, it's tough to stop.

I wish I had a solution, but throwing another trillion dollars across the country isn't going to do it and it's just another trillion dollars tax payers will have to cover in the future.

I'm getting more and more concerned about things as I hear more earnings statements from companies.

And how would like to live in California, file your taxes in the next couple of months and instead of getting a refund check, you get an IOU... yep, it's happening.

What happens when states run out of unemployment money? Yep, it's happening.

Ok, enough gloom for today...

Is Reality Finally Setting In?

Here's a link to a story that finally sounds like reality may be setting in for many. http://www.msnbc.msn.com/id/28823013/

Just as in early 2008 when everyone was saying "Recession? What recession?" and then in mid 2008 they were saying "Oh, just a mild recession, a 'shallow' one." and then in the fall of 2008 it was "Oh, wow... ummm, ok, it's pretty bad, but the 2nd half of 2009 will be fantastic.".

Now, finally there are some coming to the realization that 2009 may in fact be a lost cause and are looking to see if recovery will come in 2010.

As to what is happening in gov't right now... what a mess. Our Sec'y of Treasury candidate is on the hotseat for tax problems, the second half of the TARP funds are on hold, a new 825 billion stimulus package that will do almost nothing... My personal feelings are that Obama is going to try to do the right things, but it's Nancy Pelosi, Harry Reid and Barney Frank that scare the absolute daylights out of me. They think they own the world right now, especially with a democrat in the White House. I hope that Obama keeps bumping heads with them and doesn't give them everything they try to get.

If I understand the 825 billions stimulus package correctly, the chunk of it for citizens will come as income tax savings in the form of modified tax rates for the first $10,000 or so of income. So in other words, you'll get a little extra in your paychecks that make up the first $10,000 of your income once it's implemented. Let's say you make $40k a year, the first $10k would come in 3 months. Spread $500 out over 3 months and you're looking at about $167 a month. If you get paid weekly, $40 a week.

Now... let me ask you something. Just what do you think will happen with that money? What could possibly be done with it that would STIMULATE THE ECONOMY? First of all, people will end up using it to pay their bills. Send a little extra to the credit card company... maybe. So, after 3 months, it's done.

If you make $80,000 a year, you'll get your $500 in bigger chunks. But if you make $80k a year, getting an extra $250 a month for 2 months isn't going to do a whole lot either. Right now, if you make more money, chances are you owe more money.

The $300 checks that G.W. sent out last year at least made a little more sense. It was a lump sum and having it in hand all at once got people to think about spending it. An extra $40 a week is going to get spent on necessities by most families.

Here's the true bottom line. The world economy is in worse shape than anybody wants to even acknowledge. Obama can't fix it. Nobody can. It's going to take time. It has to play itself out and we have a long way to go folks. I'm sorry to say.

By the way, did you see/hear the local headline yesterday? North Carolina unemployment shot up from 7.8% in November to 8.7% in December. Almost a full percentage point in a MONTH! And that hasn't taken into account the layoffs that are about to begin in the banking industry primarily in Charlotte. What do you think the U.S. unemployment figure will be when it's released...

Now, do keep something in mind. The recovery in the stock market during a recession does start before unemployment hits it's worst levels. So, don't track unemployment as your gauge of when stocks will turn around. As unemployment continues to get worse (because it's a lagging indicator), the market will eventually turn around.

Well, that's enough cheery news for one post. Have a good weekend everyone.

Every Other Day Down

Tuesday down, Wednesday up, Thursday down... What will Friday hold? I say down.

How's this for a prognostication... the wave pattern may have fully formed, so here goes...

The S&P closed around 825 today. The next stop will be at around 760 in the next couple of days. At that point everyone will be claiming "double bottom" (from the Nov 21 low) and a rally will ensue to around 880-900. At that point, we dive down to approximately 625 rather quickly (a couple of weeks or so). There will be panic and fear. Those that had hung on thru all of this so far will throw in the towel. Don't fall for it if you're still in.

After that bottom around 625 the incredible rally I've been talking about will take place over a matter of a few months. It could take us to around 1000-1100.

In Dow numbers, the bottom is around 6000, then the big rally to 11,000.

At that last peak, it'll be time to get out again for a year or more. But there's plenty of time to talk about that later.

Oh, and I just read this article... imagine a world without Sears/Kmart...

http://finance.yahoo.com/family-home/article/106466/Where-You-Won't-Shop-in-2009

Word of the Day - Whipsaw

They say that if a bear market doesn't scare you out, it just wears you out. And that's what we've been seeing of late. Very big down day on Tuesday and a big reversal on Wednesday. It's like predicting the weather, it's always changing. And it wears out the true traders out there.

So, my two scenarios from the other day are still in play and I believe the up move could continue for the near term to suck folks back in. The big question that's been out there for almost two months is "Was Nov 21 the bottom?" Of course we just have to wait and see. You know where I stand.

If we're going to move down another wave, it has to start today, otherwise we're looking at a rally for a few days.

A Roaring Welcome For President Obama

At least the inauguration and events were wonderful. Wall Street certainly wasn't. Dow down over 300 to close below 8000.

In my last post I had two scenarios and "A" won. The weakness in banks over the long holiday weekend dragged the markets down and there was no interest in buying. Citigroup is now at $2.80 a share, down 20% again today. In 2007 the stock was at $50. Bank of America is at $5.10, down almost 30% today, again it was a $50 stock at it's peak.

Folks, things are bad. England and the US are both hurting. The list of issues is long. The list of valid potential quick fixes is short. I think it's finally setting in that this thing is going to have to play out.

Since my friend asked me where I'd put some extra cash right now on January 8th, the markets are down 10%. My answer of "your mattress" was the right one so far.

The wave structures are still murky. A bounce maybe? A rally? Or just straight down to test the low of 7500 on the Dow? Or beyond?

The wave structure that appears to be the most likely has this down movement taking us to 6300 on the Dow before the 50% rally that will follow. But there's a little nagging issue with that structure in my mind and eye... We'll see.

I wish President Obama the best of luck in his new job. He'll need it. It's a shame that he's coming in at such a bad time. If we were near the end/bottom of this he could pull us up from here. Unfortunately we're not near the bottom yet and after a year or so he could end up being blamed for not "fixing" everything.

Devils Advocate (with myself)

As usual I've spent my spare time over the weekend reading too much, hypothesizing too much and overthinking. What have I come up with? As usual, arguments for both sides as to where the market is headed from here in the next couple of weeks.

Position A: The markets are weak. Banking index close to November lows, Dow dipped below 8000, bad news coming from Bank of America and Citigroup, earnings season is beginning and not looking good, request for rest of the TARP money, other countries going down the tubes like England and Ireland. Result: markets down.

Position B: Obama and his team come out with guns blazing right out of the gate. We've already heard about the 825 billion dollar stimulus package being put together, the rumors of changing the mark to market rule, finding ways to restructure home loans, setting up the "bad bank" to take the bad assets from banks, and a whole host of other straw grasping ideas. Results: markets up

The markets are emotional, they make moves based on emotion. If Position B does happen, there will be euphoria... for a little while anyway.

This is just short term thinking. The long term is still down. Magic tricks are fun to watch and you enjoy them for a little while after the show is over, but pretty soon the excitement wears off and you're back to your reality life.

If Position A is the near term path, the target on the Dow is 6500 before the big bear rally that'll take us to 10,000-11,000.

If Position B is the near term path, we may by pass the dip down or it'll simply be delayed.

And For My Next Trick...

What does our wonderful gov't have up it's sleeve next? This is not a democrat versus republican thing, this is just the federal gov't in my mind. They're feeling the pressure to do something, anything. They're grasping at straws now. Their usual arsenal is just about empty now. Interest rates are at zero, they've tried pushing trillions of dollars into the big banks to keep them afloat and to stimulate lending, what's next?

Rumors of a federally run shill bank that would be used to take over toxic debt so it can be removed from the balance sheets of the banks is being tossed around. Rumors of letting the courts mandate new home values and loan terms for people filing bankruptcy is being tossed around (this one is so wrong on so many levels... I know, I'll file bankruptcy so I can get a better loan... you know people would do it). And then there's the idea of changing some accounting regulations such as the mark to market rule. If this one gets changed, all it does is change how banks debt is valued. It doesn't fix the problem. But hey, if it makes things LOOK better, who cares. If this one happens you can expect one hell of a rally on Wall Street. Again, it's all about the looks, not the substance.

I'm sure that Obama and his new crew have many ideas that they're just waiting to announce on or after Tuesday. I hope that they're better than the ones so far. I hope they have some substance to them and aren't just smoke and mirrors. The problem with the economy... the GLOBAL economy is bigger than just spending a trillion dollars on infrastructure and giving each of us $500 (in small increments in our paychecks over a 4 months period).

Until this thing plays out, which it has to do eventually, we won't be able to stabilize and then build a solid base for the future. Everything being done truly is delaying the inevitable. We need to go thru the pain. Again, the band-aid analogy... peel it off slowly or just rip it off...

Short Term Low????

On Thursday the Dow dipped to 7995 intraday before snapping back nicely the rest of the afternoon to just above break even at 8200. The question is though, was that the short term bottom before the big run-up? I wish I knew the answer. It's Friday morning and the futures are up very nicely right now which indicates a higher opening. Although Citigroup and Bank of America are on the verge of collapse (and their stock prices reflect it), their earnings and plans for the near future have them up sharply this morning. The psychology of Wall Street defies logic at times... it really does. They're like little children sometimes in that if you show them an icecream cone they completely forget that their house is on fire right behind them.

Anyway, as always, we're just along for the ride. Have to see where the market wants to go and try to play along. I'm finding that I'm HORRIBLE at the short term intraday trading. I'm much better with the bigger picture and I may stick to that. I can't give up on the daily stuff quite yet though. :-)

Have a great weekend folks.

Mid Week Madness

A wild Wednesday for the markets. Started off weak and then stayed in a range pretty much the rest of the day. A test of the low from the morning held in the final few minutes. Does that mean a bounce in the morning? Who knows in this market. Bad news gets ignored for over a month then all of a sudden news that to most is obvious such as bad retail numbers causes a 250 point drop. Go figure. After 7 straight days down a bounce would make sense. I placed a small bet on it by selling some of my short shares and going long. Based on my timing of late, I'm sure I'm wrong. :-)

As a reminder, I dabble in some daytrading with a very small amount of money (and getting smaller every week). It's fun when I'm bored sitting at home.

Q: How do you end up with a small fortune daytrading?
A: Start with a large fortune.

The retirement money is still sitting in the peaceful stable value funds waiting for the entry point. As I get a clearer picture of how low this next major leg down will be I'll start moving it back in. We're within a couple or so weeks of the new temporary bottom.

Overall, there is no end in sight for the bad economy to turn around. A couple of weeks ago all of the talking heads were saying the second half of 2009 would be better. Now they're starting to see that the bad keeps getting badder and the second half of the year may be too soon.

Options expiration this Friday, inauguration next Tuesday, Citibank breaking up their business, Bernie Madoff hearings, Steve Jobs 6 month break due to health, earnings starting to come out. A lot out there to sort through and digest.

Here's an article saying housing prices won't bottom out until the 3rd quarter of 2010. http://www.bloomberg.com/apps/news?pid=20601213&sid=aov5kTvfFfAU&refer=home


The wave structure right now says we could go just about straight down to about 6500 on the Dow from here. That's the primary pattern right now. An alternate pattern (a lot less likely) has a move down to the previous low of 7500 and then a medium sized bounce up to around 9500. Can't wait to see. Got any popcorn?

Speaking of popcorn, Debra and I went and saw the new Clint Eastwood movie over the weekend. It was fantastic. Also one of the most politically incorrect movies ever. Be sure you can handle blatant racism. Imagine Archie Bunker on steroids. But truly an excellent movie. Some Oscar nominations are likely.

If You Don't Believe Me....

You have no idea how refreshing and relieved it was to see the below response to an article in the News and Observer this morning. (see link at the end of this post)

If you haven't believed, or wanted to believe, or hoped I was just a crackpot, maybe hearing it from a respectable source will help. Sure, he may be as crazy as me... but his targets and his timing of events is exactly what I've been saying... I'm sorry to say. But if you're prepared for it, you can survive what is likely to be coming.

The bottom line is this... the expected 2009 earnings as they stand right now for the S&P 500 is $42. With a P/E of 15 that puts the S&P at 600. During a bear market the P/E is historically 10 or less. At 10, that puts the S&P at 400!!! (It closed Friday at 890) These numbers don't lie! Sure, earnings expectations could rise, but do you actually see that happening soon? Do you think that companies will suddenly find new revenue they didn't expect? Do you think people are going to suddenly start spending again? Look at this chart showing the earnings estimates for 2009 and how they keep being reduced. Cut in half since the first estimate was released. https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmynArI5HACZjSCzSdkU-xU26feyyNqTa8fp-xs6BvhYBWJOaGQlzVQP-gXZJ7hHvS-UXr-qQ6FNghGBxrWAGucqrHYsA2VG-Bv536YYWr0bhjhCKYpQuaFQWP1oDB4eqV57HFYq1WMZx3/s1600-h/S&P-Earnings-2009.png

The jobless and unemployment numbers yesterday were ugly. They were expected, but the unemployment number was expected to come in at 7.0% but came in at 7.2%. That's huge. But one number buried in all of that was one that looks at the average number of hours worked in a week. It dropped to 33.3 hours. The lowest reading since it was recorded in 1964. This is an indication of further layoffs. Potentially massive layoffs. Employers are trying everything they can try to save jobs... cutting 401k contributions, cutting off overtime, reducing work weeks. I give these companies credit for trying. They're doing what they can to avoid hurting their employees. But this camels back is bending and that final straw is on the way for many companies. Read the headlines... January is going to be filled with layoff announcements. Again, a lot of companies didn't want to layoff during the holidays out of kindness. Unfortunately the cold winter will feel colder for many.

If this sucker rally to 10,000 on the Dow (1000 on the S&P) shows up in the next month or two, GET OUT.

Have you received your Q4/Year End statements yet? Mine have been drifting in the mail the last couple of days. Don't ignore them, look at them and if you watch CNBC and the only thing the cheerleaders are saying is "Well 2009 can't be as bad as 2008 was!" That's not exactly what I would call analysis or an educated assessment. That's like tossing a coin in 2008 and it coming up tails and therefore it must be heads when you flip it in 2009.

http://www.newsobserver.com/print/sunday/work_money/story/1362370.html

It's Been A Week??

What a slacker I am... not a single post in a week. Really not much to write about. The markets are still just bobbing around. They did have a nice rally to start the new year off, up to 944 on the S&P. Then the drift down the past couple of days. So now what? Well there still isn't a clear direction and the indicators are still mixed. We're right back where we started last Friday. There is still no valid reason for the markets to rally, but sometimes that just doesn't matter. If people want it bad enough it'll move up. However, the institutions still aren't doing any buying. The rally that started the year off was the small timers. Until I see the big boys buying in, I'm waiting.

Now, I had a buddy of mine ask me what I'd do with a pile of cash right now. He has some money that he's itching to invest while things are down. He asked me "where should I put it". My response was "under a mattress". And that's what I'd do for right now, a week or two anyway. Until the market picks a direction I don't want to get back in. I'm ready to put my retirement money back in, but I believe we have one more move down to come in the very near future.

Once that happens, it's rally time. A multi-month rally. It'll be strong enough and long enough that it'll suck everyone back in that got out. They'll keep seeing green up arrows at the end of the days and the weeks and they'll finally say "I can't take being on the sidelines any longer, I'm getting back in." When the Dow gets near 11,000, just as everyone is dancing in the streets that we're within 3,000 points of being back where we were in October 2007, the rug will be pulled out.

The days of putting money in and leaving it are gone. You're going to have to manage your money now. You're going to have to move, bob and weave, be alert. The next 3-5 years are going to be difficult.

I told my buddy that depending on what gloom and doom forecast you listen to, Dow 5000 is in the cards for 2009 or 2010. Some say even lower. As each wave unfolds I'll have a better handle on it.

Bottom line... hold on for the next week or two. If this is the next leg down we'll get to 7500 on the Dow again and possibly lower. Once that movement exhausts itself, it'll be time to get back in for a while. Don't be surprised by one last gasp attempt at a move up before we go down. Pretty much the same thing I said last week. The drop the past couple of days came just as expected. Now is decision time for the markets. The jobless numbers tomorrow will be ugly. Ugly beyond what Wall Street has already anticipated? We'll see. That may be why we've lost 5% in the past 3 days, anticipation of the bad number to be announced, therefore a rally wouldn't be a surprise.

Here is a diagram to show where we are in the grand scheme of things. This picture is not to scale for price or time, it's a generic diagram of a typical Grand Super Cycle that covers over 200 years. But it shows what the potential is. Take it for what it's worth.

http://evilspeculator.com/wp-content/uploads/2008/12/ewt_path.png

Happy 2009!

I hope that the title of this post proves to be true for everyone.

It looks like the markets want to start the year off on a high note. They ended 2008 with the biggest final 2 days of the year ever. Almost ironic considering 2008 went down as the 2nd worst year in history.

So, is it rally time? If so, for how long? The markets simply refuse to go back down, so what else can you do... I'm not willing to put any of my retirment money in at this point. We're about 15% above the lows set on November 21. There may be another 10% from here, but that's just a maybe before we see a leg down. It's tempting... but there's still too much indecision out there. With a rally during very low volume you can't be sure if it's real or not. I'll wait. But I may buy some long shares to counteract the shorts I'm holding right now. At least break even if this rally decides to run a little bit.

There's so much hope out there with Obama coming into office. And unfortunately if you base your trading on "hope", you're in trouble more times than not. It may work for a couple of weeks but eventually reality sets in.

Here is a link to a story of a group that made some very accurate predictions for 2008 (not many people that were right about what was coming. Most said the S&P would end 2008 at 1500). And they've included their predictions for 2009.

http://market-ticker.denninger.net/archives/689-Where-We-Are,-Where-Were-Heading-2009.html