This is my long term view of the US stock market, mostly through the lens of Elliott Wave forecasting.
Long Term Elliott Wave Count of the Dow Jones Industrial Average
The picture above shows the current position of the US markets. The Elliott Wave count is inspired from the wave count of the late Zoran Gayer shown in the picture below. Zoran had a brilliant unique way to apply Elliott Wave (the study of the price created by recurring pattern in human psychology) that seems much more practicable than other counts. The most striking is the forecast he made in 2004, that is still playing out today.
According to Zoran and other brilliant Elliott Wave gurus, we are currently in a Wave 4 of SuperCycle degree, within a Wave 5 of a Grand Supercycle degree. I have labeled the wave counts down to the cycle degree in the picture above.
If we assume that 2007 was the top of wave 5 (according to Zoran), wave A low of cycle degree happened in 2009, after the real estate bubble burst. If these assumptions are correct, the bull market that started in 2009 is merely a Wave B of cycle degree. This is supported by the deceleration we can observe (described below) and by the wave overlap, as well as the massive monetary easing it requires to keep this market artificially afloat.
In the long term picture above, I also highlighted the fractal nature of each secular bear market occurring within over 100 years (red numbers). These fractal numbers (f1-f5) simply compare location and shape of peak and trough to those of similar secular bears. Please note that secular bear markets often appear as sideways price action, but factoring inflation into this very long term picture will give a different view (see picture at the end of this post).
The fractal position of the current correction suggest that we are not done and that we should get at least one more volatile downswing.
I also noticed the curious recurrence of a fractal (3 waves up, dip and sideways chop, then takeoff) between f3 and f5 in all secular bear periods that is still absent from this period.
Zoran’s long term view (created in 2004) – I added the two big red yearly labels
Just as Zoran foresaw so many years ago, I believe we will continue in this volatile sideways period for a longer time than most people would anticipate. This is also supported by a look at the P/E ratios, which still haven’t fallen to levels from which prior decade long bull markets kicked off.
Long Term Count, Yearly Candles
The picture above is the same as the first picture, except that I switched to a yearly candle view. This helps us to visualize the divergence in the Momentum Indicator (RSI) in the current period and compare it to the prior secular bear market. If we really saw the top of Supercycle Wave 3 in 2007 (Cycle 3 of SC 3 in 2000), the overshooting of the blue Super Cycle EW channel toward the red Grand SC channel is expected. It appears that we are just about finishing a backtest of the upper channel line and that we could be on our way to the lower blue channel line within the next years.
Medium Term Count – showing deceleration and overlap
A potential medium term wave count allows for further upside (after a pullback to complete wave b of Y). I believe we are currently in wave B of b of Y (the B is what I have shown in most prior tactical views). I added the green bubble to show the deceleration that is taking place since this bull market started in 2009. It is further indication that the liquidity fueled rally seems to be coming to an end.
Small Cap non confirmation
Further sign of the maturity of the bull market is the glaring non-confirmation we are getting from the small caps (Russell 2000 bottom chart) when compared to the large caps (S&P 500). As you can see, the S&P made new highs in 2012, whereas the Russel did not. Another divergence seems to be playing out right now, where the Russel appears to be backtesting a channel or wedge break, while the S&P is still much stronger.
Long term view of the S&P 500 adjusted for inflation ( (c) BofA, Merrill Lynch )
According to this evidence, I believe it is important to stay nimble and pay attention to the signs the market shows us. Eventually this sideways period will break out into a massive bull market. The longer it takes, the greater the bull will be. Many analysts believe this has already stated, but I doubt that.
