E-Wave for the S&P 500 Index

[RCKS]

Has the Fed Made a New Bear market Possible?

http://www.pretzelcharts.com/

This was posted Saturday by pretzel

"Before we discuss the present, we need to lay some groundwork; a look backwards to help us look forward. In 2013, we had a similar -- albeit 180 degrees reversed -- situation, so let's begin there.

On January 14, 2013, I published an article titled A Survival Guide for Bears in a Bulls' World. I wrote that article because a lot of my readers were bears at heart, but many of the charts I studied pointed the other direction, toward a massive bull market. The technical charts had set themselves up into what seemed to be a large "bull nest" (a series of first and second waves pointing higher). Since the third wave is often the longest and strongest, a bull nest is a "launch pad" pattern. In addition to that, the Fed was beginning to pump unprecedented amounts of liquidity into the market via "QE Infinity" (a term I coined, incidentally, when I was writing for Minyanville -- and which many others have used since).

Over the subsequent weeks of early 2013, I outlined my long-term targets for the S&P 500 (SPX), which pointed to the potential of a strong bull market and substantially higher prices. And the fundamentals backed up the chart projections.

Now, when I say "fundamentals," I don't mean irrelevancies such as the actual economy (only professors are naïve enough to believe the stock market is driven by the real economy) -- I mean the only "fundamental" that has actually mattered to the stock market over the past couple decades:

The Federal Reserve.

When the Fed (and other Central Banks) are creating unprecedented amounts of money from thin air, as they were doing from 2009 to 2014 (and beyond), then asset prices almost have no choice but to rise. Asset markets are all driven by the simple laws of supply and demand -- so excess cash (liquidity) equals excess demand. More demand than supply equals rising asset prices. When the Fed is printing as much money as they were, then huge pools of cash all end up chasing the same resources -- stocks, bonds, real estate, etc. -- and that drives prices higher, because it must.

Combined with the Elliott Wave patterns, it wasn't hard to see that stocks probably had no choice but to rally in such an environment.

Thus I tried to warn bears about that pending bull market... but to my surprise, many bears didn't like that. Many didn't want to hear it at all, in fact -- and the bullish articles I was writing in early 2013 were, at the time, anyway, some of the least popular articles I had ever written (!). Those articles actually cost me some readers.

Of course, now everyone looks back and views those bullish predictions in a much different light. But when I was publishing them in real-time, they were quite unpopular-- to the point that for a while, I had to spend time looking for small turns against my always-bullish big picture outlook, just to give my bearish readers something to do.

I suspect the articles I've been writing more recently will be similarly unpopular with bulls.

Because here's the thing: Nearly 5 years later, the charts finally began to give signals that the bullish move might be getting close to exhausting itself. On October 4, 2017, I wrote:

Given the structure of the entire wave, there is a genuine possibility of an extended fifth wave, so bears are going to want to be careful... We have to be aware of the potential for an extended fifth, which, outside of technical analysis, is also known as a "blow-off top."

In Elliott Wave, the fifth wave (extended or otherwise) is always the final move before a correction. As time progressed, while the near-term waves kept pointing us toward higher prices, it became obvious that the extended fifth wave was indeed underway. On December 18, 2017, I concluded the update with:

A few months ago, I began talking about the possibility of an "extended fifth blow-off top," and it appears that's what we're now unwinding. These can be very difficult to trade if you're a bear, but they're gobs of fun (for as long as they last, anyway!) if you're a bull. The thing about extended fifths is that they do tend to retrace rapidly -- so once this ends, it's going to catch a lot of bulls by surprise.

We continued looking for higher prices virtually every day -- up until January 31, that is.

The main reason I'm mentioning all this is to provide perspective and lay the groundwork for the remainder of this article, by establishing two points:
The Federal Reserve is a force to be reckoned with, and their actions can help point the way toward the market's future -- as we've seen time and again.
I am not a "perma-bear." To the contrary, despite the fact that I've always believed the massive money printing from the Fed would all end badly (and despite a few near-term hiccups along the way, where I sometimes thought additional near-term downside was forthcoming when none was), I've remained long-term bullish pretty consistently for the past 5 years. So if I say "look out below" now, it's not coming from an unbending bearish bias (truth be told, I've grown rather fond of trading this bull market and would prefer a bear market to wait! But the market doesn't care one iota about what I want.)

Finally, there is one last piece of groundwork that needs to be laid: On October 30, 2017, I penned an article that I consciously intended as the final chapter of a book that began with January 2013's bullish "Survival Guide for Bears in a Bulls World." I was aware that I was writing this bearish "reality-check" article a bit prematurely -- but I did so intentionally, because, as I wrote in the article itself:

I have recently become aware that there seems to be an entire generation of new investors who have absolutely no idea what's been going on.

They apparently think the 2009-present bull market was driven by... I don't even know what. Magic fairies or something.

So I don't want everything to come as a complete shock to them when it starts getting real. The time for education isn't in the midst of a crisis, it's beforehand. And again, don't get me wrong, I'm not saying that's going to happen tomorrow. But forewarned is forearmed.

How many of us have read the fresh horror stories of people who were wiped out by the massive recent spike in the VIX (Volatility Index)? I believe those traders could have lived to fight another day, had they only been forewarned of the danger before things "started getting real."

Anyway, this "bearish bookend" article I'm referencing is titled: The Acrobats: Why the Central Bank-Driven 'Prosperity' Must Eventually End. If you're not familiar with it, it discusses the role of Central Bank liquidity in the modern market, why that intervention leads to "unintended consequences" and inevitable problems (including negative impact on businesses) -- and it discusses some of the basic foundations that underpin the rest of this discussion.

Instead of waiting here patiently while everyone runs off and reads it (I'm on a tight schedule!), let me briefly quote one of the key points of understanding from that article:

Bull markets do not come about because of “good economies” (although they can). Ultimately there is only one thing that drives a bull market:

Liquidity.

When there is extra cash floating around (liquidity), then some of that cash finds its way into the market. That means more buyers. More buyers than sellers means a rising market. Sometimes extra liquidity is the sign of a healthy economy (which is what has led to the thinking that "good economies create bull markets"). But in today's world, sometimes the extra liquidity has nothing to do with the fundamentals of the economy.

To better understand this concept, Americans might consider looking around and asking themselves: “Is the real economy significantly better than it was in, say, 1997?”

Most who lived through that time would answer “No, it’s not.”

Yet the S&P 500 is currently trading at roughly double the highest price of 1997 even after being adjusted for inflation.


If the above concept is foreign to you, then I suggest reading the entire article when you have time, because the topics it discusses are necessary in order to truly understand what is going on in the world right now, in the present -- and into the future. And why.

Let's get back to discussing the market for a moment:

While we were on the right side of the trade for the rally, we were also well aware that when it ended, it was at least possible that this would kick off not merely a "correction," but a cyclical bear market, in the form of a high-degree fourth wave.

However, that cyclical bear would probably still come in the context of a secular bull market, and would likely not be the final end-all to the bull market that began in 1982 -- though it would almost certainly trim current valuations substantially, amounting to collective trillions of dollars of "paper profits" being destroyed in investors' stock portfolios.

This is what the technicals (the charts) were/are telling us.

But what are the fundamentals saying?

To learn that, we have to look at what the Federal Reserve is doing now. Because what they're doing now is very different than anything else they've done since 2009.

Back in September, I briefly discussed (in a very tongue-in-cheek manner) when Janet Yellen announced that the Fed would begin to shrink its balance sheet, a process which the Fed calls "normalization."

If anyone doesn't already know this, at present, the Fed has a monster balance sheet, unprecedented in history. The chart below is from the Fed's own website. It doesn't look so bad at first glance, because they put M next to the dollar amounts, leading you to think these are "millions of dollars" -- however, at the bottom they disclose that these millions of dollars are themselves measured in millions of dollars! So this scale is "millions of millions" (cue Dr. Evil clip).

Meaning that the Fed's total assets number in the TRILLIONS of dollars (over $4 trillion currently)."



To be continued in next post, just too long for one post, IMO