The US markets are at record highs and the financial press is abuzz with calls of “secular bull run” and huge targets for the Dow and S&P. Not entirely unwarranted, I would say. But what are the internals of the markets telling us now? Let us take a look at the financials sector, which outperformed the S&P by a wide margin since the summer of 2012.
The big picture is always a good starting point and here is my Elliott wave count on the long term charts of XLF.
This is my preferred wave count and the price action so far seems to justify this view. The move from the 2009 low looked impulsive and initially warranted us to treat it as an impulse. BUT, the move off the 2012 low is not indicative of a powerful wave 3 (which it should have been if the initial move off 2009 low was an impulse). At least not so far. Also Waves a (blue a) and c (blue c) are related to each other by a typical fibonacci relationship that is indicative of a corrective rally.
Now, let us zoom in on the move off the 2012 lows.
Just eyeballing the waves here, one can easily discern that wave 5 (red 5) is the longest wave. In technical terms, this is called an extended 5th wave. Wave 5 (red 5) measures just a shade over equality to the distance traveled by waves 1 through 3 (red 1-3). The wave principle tells us that is a very common behavior for extended 5th waves. Momentum too has not made fresh highs when price made a high of 18.4 on the 14th of March 2013 (not shown on chart).
Adding all these evidence and taking into account the typical corrective behavior after an extended wave 5, we must not be surprised if XLF gets slotted down quickly to 15.5 from yesterday’s close of 18.07 – a potential decline of ATLEAST 15%.
Could I be wrong? Sure. The financials could shoot higher and make me look silly. But, unless one takes a swing at such low risk set up’s one cannot score big. Micheal Jordan had to miss 9000 shots in his career to become the greatest basketball player in history. So ago ahead, pull that trigger nevertheless.
Cable (GBP/USD) has been moving in a triangle pattern since 2009 and yesterday’s sharp and convincing dip below 1.5630 marked the end of this triangle formation.
Cable’s monthly chart (above) with its Elliott Wave count shows that the currency is embarking on its 5th wave of decline. The target for this breakout is mammoth - Over the next 12-24 months we are very likely to see a level of 1.345 at the very least but will not be surprised if we see a level of 1.165.
When such a large text book pattern comes to fruition, clearly there will be some economic/fundamental tail wind supporting it. We are not going to bother ourselves with those and will leave it to the economists to decode that for us. However, we need to be aware that such a large movement in a major currency is unlikely to occur in isolation. The Dollar will very likely strengthen against other major currencies. This is terrific news for Dollar Index bulls and bad news for many risk assets including precious metals and equities that rely on weak dollar forever.
Disclosure: I’m short sterling since January 2013 from 1.6113.
Apple dropped below 623.55 on Friday and that marked a 5 wave decline on a small degree. We know that when a market declines in 5 waves it normally happens to be a part of a bigger move.
With that in mind, let us look at the bigger picture – the real big picture. As shown in the monthly charts below, it is possible to count 5 waves from the 1997 low. And at the top of wave 5 a clear drop in momentum readings – a disagreement between price and momentum.
Let us zoom in little more closer – the weekly charts. The 5th wave starting from the 2009 low can be interpreted in a couple of ways.
My interpretation is that the first wave within the 5th was extended. In that case we have a perfect ending relationship – Waves 3+5 are 0.382 times extended wave 1. The momentum divergence here is more pronounced than on the monthly charts. So there is a good chance that the top 705 was a wave 5 top.
Seeing the above evidence, I lean towards the possibility that AAPL has seen a MASSIVE TOP, a 5th of a 5th. If I’m right, we are possibly looking at AAPL declining to $80 in the next 3-4 years. Either AAPL will burn cash or competition will crush AAPL or some other form of roadblock could be the reason but we are not bothered about the reasons. Reasons will come later. Think such a decline is not possible? Think Nortel, Juniper, Himachal Futuristic, Satyam to name a few. Short term: Apple could bounce from sub 600 to 650-674, if it does, I think it will be a low risk selling opportunity.
The broader implication if this analysis is correct – the world is up for some nasty months.
Disclosure: I’m short Apple. I own a couple of Iphones and an Ipad and I will be Queuing up for Apple’s mini Ipad.
The sentiment in the investment world is on a sugar high over QE3. Retail traders are talking about sky high targets and broking houses are dishing out lofty year end targets. Now let us stop for a moment, jog our memory as to what effect QE2 had on equity markets around the world. Date of QE2 announcement: 3rd Nov 2010. And here is what happened in Nov 2010…
It wasn’t just Asian markets. The picture across the CIVETS markets was pretty similar.
This is not a complete list of equity indices that topped in Nov 2010 but I guess this is enough to drive the message.
Given that the new QE is not much different from earlier QE2 except for some small bells and whistles, should one expect a much different outcome now and turn bullish on the markets for the long term? What was that Einstein quote about insanity?
I’ll be watching the charts for reversal signals and be ready for a big punt if one comes through.
A recent business insider article calls ‘Gold bugs’ thin skinned misanthropes because Warren Buffett “..devotes a few paragraphs to gold and the fools who worship it” in his upcoming annual letter!! Regular followers of this blog know that I had turned cautious on Gold around $1700′s and bearish in September 2011 – just establishing I’m no gold bug.
In my May 2010 post, I had highlighted how such fancy theories can be quite flawed and prevent you from arriving at the best investment decisions. Now to Mr Buffett’s renewed Vitiriol against gold:
1) The cube of gold will produce nothing in the next hundred years
My answer: No one makes investment decision for next hundred years
2) The cube of gold will not pay you interest or dividends, and it won’t grow earnings.
My answer: So will be the case with a boat load of stocks. The S&P has gone no where in the last 13 years.
3) You can fondle the cube of gold, but it won’t respond.
My answer: Yes, witty. Hence I’ll try to be funny too. Mr Buffett should know what to fondle. If you own lots of gold you do not need to fondle, ‘they’ will fondle you
The reason for Mr Buffett’s bashing? Well, whatever I say would purely be a guess but I would let the performance of Gold speak for itself:
Gold’s return for the last 10yrs – 488.19%
BRK’s return for the last 10 yrs – 67.77%
Gold continues to wallop the performance of Berkshire Hathway by a GIGANTIC 420% over his preferred time frame of 10 years.
And if you had listened to Mr Buffett’s Annual letter of last year, you are in the elite company of those who missed the best performing asset class of 2011 – long dated bonds that returned almost 30%.
Here are the words of another billionaire who is in the same business. “At the end of the day, your job is to buy what goes up and to sell what goes down. So really who gives a damn about PE’s?” – Paul Tudor Jones
The Baltic Dry Index has been dropping continuously for the last 31 sessions. The index just broke through the 2008 low and this is worst reading on this index for the last two and a half decades.
If you are wondering why should this be of any significance – the index is a very important measure of the health of global economy. You could either believe the commentators who are saying that we are seeing rally in equity markets because Europe is “close to being solved” (when Maths 101 tells us its impossible) or pay attention to the warning signal from this index and stay cautious and try to be safe.
Heromotors seems to be having some sort of love for double tops. The chart below shows the recent chart pattern for this stock.
Regulars of this blog would recall from here that ahead of Heromotor’s announcement of ending its tie-up with Honda there was a similar formation and the stock had a sharp drop to 1375.
Once again there is a double top pattern in this stock when the benchmark indices are set to fall further. What can also be seen from the bottom panel is a huge block crossed ahead of this lowest close of 1965 and a breach of 1910 on the daily chart. Also the stock seems to have completed its 5th wave on the weekly charts (labels not shown).
Disclosure: My premium subscribers are short here.
The regulars of this blog would recall my August post on the USDINR cross rates. Within that larger picture, the short-term is moving to the next stage.
A narrow consolidation after a powerful move and a wide range bar. The next stage of Rupee weakness is here.
Inter-market analysis provides an extra dimension to technical analysis – the peripheral vision and the backdrop in which we are operating. Here is one such inter-market factor. To me this is pretty much like looking at the charts of the Baltic Dry Index.
Over the last few weeks if you have been left wondering if the markets around the world have turned a corner, you might want to have look at the following pictures.
Please click on these pictures and have a larger view. As you might understand from the caption, these are cargo vessels that have been standing idle for months together here in Singapore and some might be more than a year. The number of vessels over the last few months have only increased albeit at an alarming pace. Talk to anyone in the shipping business they would tell you what these pictures are telling. I personally know someone who owned a ship and went bankrupt – their next generation is still trying to pay off the debts and in all likely-hood, that person is unlikely to pay off the debt until their retirement age. The same would be true of corporations. In short, this is not a cheerful sign.
Singapore backlog – a small video clipping of the ECP coast (singapore).