Henning: The Musings of a Stock Market Curmudgeon

By Thomas Henning

        The great American treasure, Duke Ellington, once suggested that there were only two kinds of music - good and bad.
        Like music, there are only two kinds of technical analysis - good and bad. The good kind first analyzes the long-term picture, and then places the short term within the context of the long term. The bad kind analyzes the short term, with little or no reconciliation with the long term.
        The good kind provides perspective. The bad kind, while often correct, lacks perspective and tends to be superficial.
        The late Edmond Tabell would analyze stock trends going back decades and then would place the near-term within the context of the long term. Thus, Tebell's analysis had perspective. Tabell was heads above others.
        The downside of good technical analysis is that good technicians tend to be early in their market calls. The have a tendency to be unduly influenced by their long-term analysis and tend to ignore the near term at the expense of lost near-term profits. They often fail to remember Keynes's admonition that, in the long term we're all dead, but we eat in the short term.
        With this conceptual preamble in mind, let's take a look at the stock market's long-term picture and then place the near-term outlook within the context of the long term and hopefully arrive at some perspective. We'll start with defining the stock market trend since the August 1982 bottom, but could easily go back much farther to the late 1780s.
        Note the idealized Elliott sequence that started August 22, 1982. To draw the model to time and price scale would serve no purpose, and I have done so in many previous articles. Instead, the model is illustrated to give perspective to the point that we are at the end of the upleg that started in 1982 and that what follows a bull cycle of 25 years is a bear cycle of about a decade complementing the previous bull cycle. There is the perspective.
The implication that there will be a bear cycle of about ten years wallows in the land of "ought." Thus, it is important to make a transition from the land of "ought" to the land of "is" to ask if the immediate technical condition validates the implication that the 25 year upcycle is done and a bear cycle of about a decade is in the cards. It does.
        Recently, the stock market bottomed on August 16th and has legged up in a terminal wave that was anticipated in recent articles. The upleg has the stench of a classic failure rally. The upmove has been driven by an extreme drop in supply that was complemented by virtually no increase in demand. In other words, the market rallied by default as demand was weak, but supply was even weaker. Virtually all other internals such as high/lows, sentiment, etc. have been very ugly. To top off the picture, the Dow scored a new high as the Transports and Advance/Decline Breadth failed to confirm by a country mile. (See chart with comparative trendlines.)
        To confirm a breakdown on a primary basis, the Dow has to close below the August low of 12, 845.78, confirmed by the Transports below 4672.35.
        In the near-term land of "is," the hard technicals are harmonizing with the long-term suggestion that the bull cycle is done, and a bear cycle is due, which would be signaled by closes below the aforementioned August key lows.
        The bond market has been locked in a topping pattern having waved out a cyclic uptrend that started in 1982. A close below 105 would bust key support and would suggest that start of a cyclic decline, a major upmove in rates. When that baby hits, things will get ugly in a hurry as the foreign holders of bonds all try to get through the door at the same time as the lemmings accelerate their defaults on houses, cars, plastic junk, and credit cards.
        The gold complex has cranked into high gear. Both the XAU and gold have cleared key highs. So far, so good.
        Near term, the wave tea leaves suggest that a breather is due. Given that a consolidation occurs, a reconfirmation above the anticipated consolidation would confirm that the III is in high gear. Paranoia: the breather could be rough when the stock market breaks down if the gold stocks get hammered with the rest of the market. This happened in 1929, and then the gold stocks moved up roughly ten times. It could be a bumpy ride so tighten up your seat belts.
        At any rate, as I said in my previous article in The Bull and Bear Financial Report: "Kiss, Kiss, Kiss - Keep It Simple Stupid"; ride the move using some major moving averages and when the momentum starts to wane, start scaling out of the position on a fractional basis. If you get cute and overtrade the move, you'll lose the position. Not good.
        The Dollar is a mess. Inversely, the Yen has had a lovely upleg as marked. A classic three-wave correction followed. An MACD buy signal flashed which was preceded by a bullish divergence. It appears that an upcycle for the Yen has started. Bad for the Buck.
The Dollar Index, while sick, looks tired on the downside being oversold and loaded with divergences. However, the Yen is strong. The carry trade has caved in as the hedge funds, who have had their equity cleaned out, are trying to reliquify and pay back the borrowed Yen.
        Under this condition, it's difficult to conclude that the Dollar Index is at a hard bottom with the potential for a sustainable uptrend. Potential rally? Yes. Sustainable uptrend? Not likely.
        In sum, the stock market is topping after a cyclic bull market, needing closes below the August lows to signal a bear cycle to complement the previous bull cycle. Bonds need a close below 105 to signal a breakdown. The gold complex has likely started its next primary upleg within its cycle, needing some minor upside confirmation.
       The putrid Dollar could rally, but the Yen is strong, which will inhibit any Dollar rally.
        The whole technical picture, which suggests a major bear cycle, harmonizes with the concept that there will be a deflationary implosion as the debt accelerates into default. This is the only fundamental scenario that harmonizes with the technical picture that suggests that a decade long bear cycle is in the cards.
        Meanwhile, the bilderboyz are in a panic busily rearranging the deck chairs on the one-world order's ship SS Titanic as the ship's band plays that classic church hymn: "Nearer my Fed to Thee."
        The beast is thrashing. The latest scam is a fund to absorb the New York banks' mortgage-backed junk so that they can get this garbage off of their balance sheets. No matter where they move it, the garbage will still stink. In the vernacular, this is known as "cooking the books."
        What's really going on is that the bilderboyz are in a sweat over the viability of the banking system, because the banking system is falling apart due to the internal rot of bad debt, and when the banking system goes, the one-world order goes.
        Stand back and let the beast thrash and make its noise as it vainly tries to ward off the coming deflationary implosion, which the Fed is trying to inflate away. Keep your sense of humor. It is vital for survival. The grand finale will no doubt occur in the 2008 election, whereby a Messiah will be elected to wave a magic wand to make everything wonderful again as tax receipts go into the tank. It's happening now as the states are starting to get a case of the shorts. The real estate implosion is putting a kink in state tax collections. In the end, it will be like the final scene in the Marx Brothers' Night at the Opera where Harpo is swinging from the stage's rafters.
        Again, we have harmony here as the near-term hard technicals are validating the long-term suggestion that a bear cycle is in the cards.
        Editor's Note: Thomas Henning's articles appear regularly in The Bull & Bear Financial Report print and online editions.