New job, new depresson, no time

Dear readers,

as you probably have seen this blog has been inactive for some time. I have a new job that takes too much of my time and I am not able to the blog the attention it deserves. This while the market initiates what is, according to Elliott Wave theory, likely to be the worst part of the crash.

Good luck out there, and don't use too much leverage!

Confidence as a business idea

Over a few postings I have written about Greece. The most recent development is that the euro countries promise to support Greece when no other option remains. Furthermore, the descision to support Greece has to unanimous. No amounts have been presented, again only abstract promises. The famous line from the movie Jerry Maguire comes to mind, "Show me the money". Until the cash dedicated to Greece's rescue has put on the table, any promise is not for real, or just another round of bazooka waving. The problem is that every time a useless agreement like this is made regarding Greece, the EU's confidence is deteriorating bit by bit and the market will eventually see the bazooka for what it really is, a pea-shooter.

So what if Greece is saved? It is of little concern since within the euro zone the PIIGS remain, and within the EU also the UK is loaded with debt at an alarming rate. Maybe the agreement will really hold for Greece, but the EU will not be able to bail out every country in the EU that needs an bailout.

The above is especially interesting since over the last week, the US sovereign bonds crashed. It may or may not be realted to the bond auctions taking place, or the health care bill that was passed, but the fact of the matter is that, since inflation still is non-existing, risk in sovereign debt is picking up significantly. When risk increases, so does interest rates, and with increased interest rates, financing costs for almost everyone increases too. To me the only unknown is for how long central banks will be able to keep short term interest rates at the present low levels. This is key since short term borrowing is financing ever more of the debt and if and when short term interest rates starts to rise, many borrowers ranging from home owners to countries will find that they have no place to go, but into default.

When monoliners such as MBIA and Ambac went bankrupt it was said that a company whose core business idea was to have a high rating is bound to go under. Something similar can be said about governments and low interest rates: When the only way to survive is to keep interest rates low, then you will soon find that lenders require a higher compensation for the increased risk in the form of higher interest rates. Eventually you find yourself between a rock and a hard place. All that debt, you should have avoided it in the first place.

The market is a forceful master

As Sweden learned two decades ago the market is a forceful master. It then first forced interest rates up to 500% and later it forced Sweden to abandon its currency peg. However Sweden learned from its mistakes and is now in pretty good shape, at least for the moment. This is confirmed by the CDS prices on Swedish sovereign debt which are about the same as the US at slightly under a 3% cumulative probability of default over the next 5 years. As a reference, Norway is in the lead with 1.36% and Argentina is found in the other end at 49%. Greece is in the 9th worst position at 21%.

With respect to Greece there have been quite a bit of a blame game as to why the debt has arisen in the first place. According to Greek ministers anyone but themselves are to be blamed and the list ranges from since 65 years extinct Nazi Germany to present day “unprincipled speculators” according to Bloomberg. The Greek prime minister also stated that “Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system.” and by doing that he clearly shows his disrespect and ignorance for the market. In fact, specuators are extrememly principled. The only principle they follow is the opportunity to make money, they do not create the opportunity themselves. Another way of regarding an opportunity is as an inbalance in the market. In the long run the inblanaces will disappear one way or the other, speculators force the inbalances to be taken care of sooner rather than later, in fact as soon as they are discovered and of sufficient magnitude. Were it not for speculators, Greece would continue running its larger and larger deficits for as long as it could. Only fraud made it possible for Greece to continue for as long as they did. Still they blame others for the situation they find themselves in. Political rationale at its finest!

So why is Greece's problems of such an interest to Swedish Waves? Well, for one, it is the canary in the coal mine in the sovereign debt spiral that will soon start unwinding. Where Greece is now, others will follow. Second, it is a real test of the Euro as a reserve currency. Unfortunately the track record of Europe's politicians honouring agreements, principles and discipline is not overwhelming. One pillar of the euro co-operation is the 3% budget deficit requirement. Greece is not the first country to break it. France and Germany already have, along with several others, and it started immideately from the euro's inception.
European leaders now have a choice to make. Save Greece (for now at least) but at the same time let the world know that austerity, honesty and discipline is not the European way of politics. As I said earlier, Greece will soon be followed by the remaining PIGS, and Europe will not be able to deal with all of then without sacrificing the worth of the euro. The alternative to bailig out Greece is to let it default on its debt. In that case Greece would suffer a depression over a couple of years but afterwards it would think twice before cooking its books again. But it would also send a clear message to all speculators out there that the euro represents trust, and trust is the one thing a fiat currency cannot live without.

Make or break Primary 3 onset

I have assumed that Primary wave 3 began the 11th of January. This assumption is now put to trial considering that corrective Minor wave 2 is approaching 100% retracement of Minor wave 1. Right now it presents a perfect 76,4% retrace which, from a Fibonacci perspective which the final obstacle to a full retrace. Below is one possible count from the assumed Primary wave 2 end, but regarding Minor wave 2 there are several open possibilities.

 There are some interesting aspects of the presented plot. First, there is the distinct possibility that the Minor wave C is terminated by a Minuette ending diagonal (yellow lines in the plot). This is one of the best patterns for identifying a reversal. Second, the possible ending diagonal is supported by a decreasing volume (violet line in the Volume segment) during the all of Minuette wave 5 which must be interpreted as weakness in the present advance. Ending diagonals end in a bang meaning that what should be expected is a swift reversal of the uptrend down to its onset which in this case is at 1086 in the S&P cash index and 1084,50 in the S&P mini-future. If and when that happens, we will know that the major downward trend is still alive.

Elliott Wave update

There are lots of things going on in the markets for the moment, and the Elliott Wave patterns say that a critical juncture is fast being approached. Below are some charts with Elliott wave counts in the main markets that I follow.

Dollar Index

DX, daily

Euro - US dollar

EURUSD, daily

Gold

XAUUSD, daily

Silver

XAGUSD, daily

S&P 500

SP 500, 4h

SWE 30 (OMX)

SWE 30, 4h

30 Year US Treasury Bonds

ZB, daily

Light Crude Oil

CL, daily

High Grade Copper

HG, daily

Good fences make good neighbours

A former boss of mine was crystal clear on one thing: Good fences make good neighbours. This was said in the context within our company, that different projects could not be allowed to parasite on the others. That is, there must be well defined rules in a society and the members must follow them. Otherwise someone will be dissatisfied and the society as a whole will lose. The same could be said about the euro and the present Greek debacle.

The Greek problem in a nutshell
What is going on is nothing more than a vote of confidence in Greek debt. This is nothing strange considering that Greece have been bankrupt in 105 of the last 200 years according to John Mauldin. It would be remarkable if it didn't happen, would it not? Greece government risks downgrade to sub-investment grade resulting in that it cannot be used as security in the ECB and hence cheaply and risk-free financing Greek debt issuance. If Greece can't refinance its debt at a reasonable cost it will be forced into bankruptcy. That will affect not only Greece but also Euro banks which are loded with PIIGS debt. For example, the French exposure to PIIGS debt is $853bn equalling 30% of its GDP, and German exposure is $707bn  which is 19% of GDP, according to Ambrose Evans-Pritchard in Markets fragile amid confusion over Greek rescue deal. If Greece goes bankrupt, then the fear is that Portugal, Italy, Ireland and Spain would follow, and in the end it would still be French and German banks that would take most of the loss from all this.


The problem is also the European power structure. The federal power is weak and real power is in the hands of the council of ministers. Here we find one of the fences in terms of a loyalty problem:  does your loyalty belong to the European Leaders G&CC or your home country? This is evident now when France, that is worse off than Germany, with respect to PIIGS exposure, pushes Germany to bear most of the burden.


Implications on the Euro as a reserve currency
It is de facto German bonds that compare to US Treasury bonds when lowest risk bonds are considered. Others' are more spiced up higher risk variants. If Germany bails ot Greece the message is that the safest EU debt is no better than the average EU debt. This could seriously damage the euro's competition with the dollar as the worlds preferred reserve currency.

Moral message
The Greek problems have been known for quite some time, but it was Greek statistics fraud that gave Greece a 13% budget deficit overnight that made them urgent. In the mean time Ireland is struggeling and lowering salaries by up to 10% for all public employees, something that would be impossible to implement in Greece. Put in this perspective it is difficult to understand why Greece should be kept afloat. After all, Greece is only 2% of the EU economy. However, in a longer perspective the question is whether Europe should keep its internal fences and in the long run benefit from the single currency, or if it will succumb to a beggar thy neghbour approach where everyone is expecting a free lunch on the expense of the others.

The tip of an iceberg
Even if the EU manages to agree on bailing out Greece, it is only the tip of an iceberg. The Euro Zone is loaded with debt - internal and external. The only uncertainty is who will be next, because, for certain, there will be another one. Unfortuntaely the candidates are several: Ireland, Spain and Portugal, or maybe Italy? Europe is stuck between a rock and a hard place when dealing with its debt. There are no easy solutions and there will be pain. In the end it is only debt unwinding that will solve Europe's problems. One way or the other.

SWE 30 update

The Swedish OMX 30 index is playing out a bit in advance of the US indices. My previous count still holds and an updated version is shown below. Having had a very complex evolution, Minute wave 2 is now in its final stage, after which we find ourselves in a wave 3 in 3. Hence, we should expect a rather fierce drop in SWE30 in the near term which is either today or on Monday if this count proves accurate.

 

SWE 30, 1 hour.

S&P 500 update

The working assumption for the moment is that Primary wave 2 is finished. However, what came next is not as evident. The previous count has not turned out satisfactory. There are several reasons for that with respect to shape and relations. Essentially I am dissatisfied with the previous Minor wave 2 resulting in a weak <38.2% correction which only lasted for 27% of Minor wave 1. Furthermore, the present correction, which is longer in duration than Minor wave 2, must in that case be of a lesser scale. All in all the count does not fit the present market, I think, why I prefer another count.

Below I present an alternative that I think has good potential. I have changed the end point of Primary wave 2. Which one it is is an even game since one peak is higher in the future and the other in the cash index. By changing the onset of Primary wave 3, I also get some balance between the corrective Minute waves 2 and 4. The bottom line with this count is that a Minor wave 2 may move all the way up to 1110 without any eyebrow needs being raised. Assuming that happens during the coming days the temporal realtion between Minor wave 1 and 2 will also improve significantly. As always, there are no determinsitic outcomes, only likelihoods, in TA but it is my top count for the moment.

 

S&P 500, 1 hour.

The Euro and Greece

Over the last year the dollar has been constantly announced dead as reserve currency. The main reason for that is the huge deficits that the US are running where federal debt is now in the order of $12 trillions. The euro zone, it has been argued, does not suffer from the same huge deficits and is long term in a much better shape compared to the dollar. A reasonable effect would the above statements be true, would be that the EURUSD rise. In fact it did rise from March until late November 2009.

However, what does it say about a currency co-operation when Greece was allowed to enter the euro although it did not meet the requirements? In addition to that Greece is manipulating its GDP figures in order to avoid facíng severe penalties from the other euro member states. These, in turn, are unable to present a plausible solution to a very real problem - Greece defaulting on its debt. That the problem is real is supported by the following news item quotes from Bloomberg:  

"The cost of protecting $10 million in debt from 15 European governments for five years hit a record $91,060 a year last week, about double both September’s cost and the current price for insuring U.S. debt, data compiled by Bloomberg show. Prices for Portugal, Iceland, France, Greece and Germany swaps have risen the fastest in the world this year and are up about 55 percent on average, the data show. Greek debt insurance is now the developed world’s most expensive at almost $400,000."

"The yield premium investors demand to hold Greek 10-year government bonds over German bunds widened to almost 4 percentage points last week, the most since the year before the euro’s 1999 introduction."

With a probability close to certainty Europe will again show indecisiveness. After all, that is what allowed this problem to grow this big in the first place, and now it will make things worse working out a solution. And on top of this European banks have lent massive amounts of money to eastern Europe and Latin America, money that to a large degree will never be paid back. The euro may be the long term preferred safe haven, but what does that matter when it is a short term unsafe haven?

At this moment it is convenient to have a look at the Elliott pattern of EURUSD. The chart is in itself a proof of which is the reserve currency of the world. Just have a look at October 2008 and March 2009 and see which currency projected strength at those instants. Your Honor, I rest my case. As can be seen in the chart below the euro started its decent late November. As of now we are in the early stages of a minor wave 3 that is likely to run for some time yet. A likely goal for all of Primary wave C (and Cycle wave C) is at least below Primary wave A at 1.23.

 

EURUSD daily

SWE 30 short term

The main Swedish stock index, SWE 30 presents few differences compared to other major stock indices. It presents a quite clear pattern actually. According to the below Elliott count, we should see a continued upward correction during the coming couple of days, after which SWE 30 will enter into a dramatic minor (or minuette) wave 3 down. A possible reversal point is the 61.8% retrace at 966 but the whole interval between 61,8% to 76,4% is filled with resistance.

 

SWE 30 1h

There are other Elliott interpretations implying that wave <2> is already finished or that wave <1> is still ongoing. The main reason why I believe that the correction is still in place has to do with the global stock market. There has been no significant correction since Primary 3 started and I think that it is about time. In that case it is highly unlikely that the Swedish stock market will fall when other markets rise. Wave <1>, on the other hand, could very well not be over. The answer to that we should find out today, I think.

Primary 3's initial moves

To me there is little doubt that Primary wave 3 has started. Where it will end is far to early to tell but S&P 500 could very well fall back to 500 or even more.

Over the past week and a half we have seen a fall wiping out the whole rise since October. Short term is a bit fuzzy but most likely are we past the worst fall in the initial (minor or minute) waves down. In other words, a correction is soon at hand if it has not already started. If that comes it is likely to retrace 50-61.8% of the decline accoridng to Elliott guidelines. My guess is that the retrace will be on the lower side since that will obstruct the bears from entering the market. The plot below shows the two alternatives I have at present. I have used NY opening hours for this plot. Often the low liquidity during off-hours distort the charts, and this is the case now, I think.

 

S&P 500 1 hour

One final option

Although my blog yesterday isn't entirely void, the likelihood that it will come true is significantly decreased by yesterday's surge. Before we scrap the present count altogether and start all over again there is one final possibility that I will present. As mentioned yesterday the ending diagonal was far from perfect. There is now strong evidence that no ending diagonal is tracing out in SP. Instead yesterday's rise is the first in the final rise up to Primary wave 2. As the percentage arrow points out in the plot, the upper bound on this rise is 1168, since wave <iii&gt; must nog be the smallest wave. This count is likely to be finished next week judging by the duration of waves <i> and <iii> which both lasted 9 days. However, any peak above wave <iii> must be considered as a candidate for Primary wave 2.

 

S&P 500

Peak of Primary Wave 2 in Stocks?

The currency and precious metals markets have already turned, and most likely the commidities markets too. From a year ago we know that copper and oil was ahead of stocks. Now there is some strong technical evidence that Primary wave 2 has peaked in stocks, at least from an Elliott Wave practitioner's perspective. Presented below are daily charts for both S&P 500 and SWE 30 and their count both says the same thing: Primary wave 2 is over. We have reached the end of the road in terms of subwave complexity for a corrective wave. This is by all means no bulletproof predicition, but sufficient enough to take a position.

S&P 500 daily

SWE 30 daily

Looking in more detail into S&P 500 it gives that the final rise from November until now is a triangle (orange) followed by an ending diagonal (yellow). Triangles are always the wave before the last, and ending diagonals are always the last wave. The ending diagonal is admittedly not ideal but accpetable. All in all it makes a pretty convincing signal that the direction of the stock market is down for some time. If it really is Primary wave 2, that period of time is more likely to be 2 years than 2 months. In time we'll know.

S&P 500 4h

Predictions for 2010

Based on the previous blog, I have made some predictions for what 2010 will bring about in the key instruments that I regularly follow. Updated sections about 30 Year Treasury Bonds and Gold.

S&P 500
SP500 is valued at P/E 23 regarding 2009 estimated reported earnings and 20 for the 2010 dito. In other words, a recovery is fully priced in already and there is little space for a further rise. However, the stock market does not always act rationally why it still may happen. Nevertheless, with its current pricing SP500 is very sensitive to any renewed credit problems which Dubai World clearly proved. Furthermore, sentiment is at its peak as showed by the Investor's Intelligence weekly surveys most recently showig 16% bears and 77% bulls. There simply are no more buyers to enter the market.

From an Elliott Wave perspective SP500 has reached the end of the road in terms of the maximum number of allowed sub-waves in Primary wave 2. Following is a most likely devastating Primary wave 3 downwards. In the chart above I present a somewhat ideal Elliott pattern, but it also gives us an appreciation about the stopping point. The initial Intermediary wave 1 will not necessarily be very dramatic, but in a Primary wave 3 any surprise that will occur will be directed downwards considering the distance it will travel. To summarise, the fundamental analysis says sell and Elliott Wave analysis gives us a Primary wave 3 target below the March 2009 bottom, possibly in the range 450-480 where the lower end represents 123.6% of Primary wave 1 and the higher level represents equality (in a relative scale) between Primary waves 1 and 3. The time frame for Primary wave 3 is most likely larger than Primary wave 1 which lasted for 1.5 years.

EUR/USD
Everybody knows that the USD is doomed due to the huge budget deficits and trade deficits that the US is running. What is less known is that all the other fiat currencies are equally doomed. It's like dividing zero with zero, you really don't know what you get. In the longer perspective the US will without doubt at some point in time inflate their debt away and may differ from Europe's path where in particular Germany is very reluctant to this approach, but we are far from that right now. At present deflation is the problem, not inflation and what counts in deflation is being able to pay your debt, and debt is predominantly issued in USDs.

The USD has plunged while stocks have surged since March. A significant reason, I believe, is that it was the cheapest currency to finance carry trade in. Another reason may have been that focus was on the US deficits and quantitative easing that all other government's problems were largely ignored. as I stated in a blog yesterday, QE has been relatively moderate in the US, contrary to e.g., the UK. Europe is faced with significant problems mainly in the west, south and east (leaving the north and center fairly stable). How these problems will be solved will decide the fate of the Euro, but my belief is that politicians don't have the willpower to do the morally right thing which is to let individual countries handle their own problems even though that means defaulting on debt. With the uncertainty this implies, and risk aversion about to grow stronger, I believe that the USD is in for a strong comeback in the short term (< 1 years).

Elliott Waves supports the above argument by identifying the the EURUSD has peaked in Primary wave B and that Primary wave C down has started. By using common wave relationships the likely target interval for this wave is in the interval 1.09-1.15. Ideally, combining fundamental and TA, the end of Primary wave C would coincide with an obvious money printing decision in the US but that is jumping ahead of things a bit.

30 Year US Treasury Bonds (updated chart and EW)

As stated in the SP500 section risk aversion is increasing which will short term work to the benefit of long sovereign bonds, in particular US Treasury Bonds mainly for traditional reasons. Counteracting this effect is the increased indebtedness and related risk of bankruptcy for governments.

Elliott Wave analysis implies that 30YUSTB is tracing out the final wave in a Primary wave 1 downwards after which it will turn upwards again. Ideally, Primary wave 1 will end within the interval 105-112 but given the possible immediate change in stocks, a shorter or even truncated Primary wave 5 has to be taken into consideration. Primary wave 2 in turn cannot exceed the previous top at 140'30.5 for the present count. A more narrow range based on likely Elliott Wave relations would be 124-131. Identifying the end of Primary wave 1 will allow us to narrow down this range even further. A previous blog deals with the relation between SP500 and 30YUSTB in more detail.

Gold (XAUUSD) (updated chart and EW)

Gold is the ultimate store of value, however, it does not help when loans are defaulting. Hence, during deflation gold is suffering as any other asset relative to legal tender. For this reason, and being true to our conviction that deflationary pressure is building, gold should fall. In the longer perspective though, when the US starts to inflate itself out of debt gold will shine as bright as ever, but we are not there yet. In addition to the above the sentiment for gold is longer term severely overbought why a pull-back can be expected. Hence, the fundamental picture for gold is short term downwards, and long term upwards.

Elliott wave analysis provides estimates on the above argued pull-back. Corrective Cycle wave 2 has just recently started which will bring gold down 50 to 61.8% of its entire rise from 2001. This brings us to a likely range between 620-720. Furthermore, a common corrective stop is within fourth waves of smaller magnitudes which there are two of in the plot. Both of them partly fit into the speciffied range but also partly fall outslide of it. Following the pull-back, and analogous to the first deflation then inflation assumption that we are working with, Elliott Wave analysis allows gold to take off rocket style.

Input parameters entering 2010

2009 went to history as the best recovery of all times. At the end of the year common knowledge is that the crisis is over and the politicians and central bankers are heroes saving the world from a depression. I don't share that view and I think the future will prove me right. As for the crisis being over there are substantial evidence that we have not left the troubled waters behind us:

1. Unemployment is still increasing. At best the rate of increase is reduced, but I don't see how an an increased unemployment rate could not be bearish for the world economy. The official US unemployment for November is 10.0%, including marginally attached workers and part time workers that figure increases to 17.2%. Two other interesting statistics are the labor force rate at 65.1% and the employment population ratio at 58.5%. The corresponding official EU27 unemployment rate for October is 9.3% and the EU27 employment rate for Q2 is 64.8%. 20% are employed only part time.
2. GDP is not rising. The US GDP figures for Q3 were initially 3.5% but has lately been revised down to 2.2% of which Cash for Clunkers is estimated to be 1.45% and a dominant part of the remainder being government spending. Imports and exports also rise, but they cancel each other out. Remains, well, nothing really.
3. Transportation is slumping as presented in a previous blog.
4. Debt is not falling but again growing, in particular sovereign debt. On Christmas Eve, the US senate voted for allowing the Fed to use up to $4 trillions to prevent the next crisis. (What do they know that we don't?) This is on top of the already existing deficit of $12 trillions. There is also convincing evidence that this debt is nothing more than a giant Ponzi scheme, in the sense that an entirely new and unknown group of investors seems to have entered the market when the Chinese exits. For details, go to Zero Hedge's link.
5. The housing market is being manipulated severely with the US government now being the sole lender for housing purchases via Freddie Mac, Fannie Mae and Ginnie Mae. Furthermore, the US government has guaranteed all of the outstanding obligations from these companies. This is in a time when nearly one in four homes are now worth less than the loan from which they were paid for.
6. Banks are still not required to mark to market why a large bit of their balances are pure fiction.
7. Monetary inflation is nowhere to be seen. Fed's decision to introduce quantitative easing by buying treasuries on the open market has not succeeded in what it was intended to do. The banks that sold the bonds have been given a free lunch by keeping the money at the Fed and thus earning interest. But by doing that and not lending the money is not multiplied and hence no inflation is created.

All in all this hardly makes a convincing case for a sustained recovery. Instead, to me it looks like temporary life support, which, when terminated, will bring back the deflationary forces and cause the markets to plunge once again.

Risk vs safety

The stock market is the market which takes on the highest level of risk, derivatives excluded. the simple reason for this is that stock owners are the last ones to recover any assets in the event of a bankruptcy. I usually use S&P 500 to represent the stock market since it is comprised of a huge number of companies but also is the most liquid futures index existing.

S&P 500

In the other end of the spectrum we have the bond market and in particular the sovereign long bonds. For the same reason or liquidity, and the long time frame resulting in a large leverage, I use the 30 Year US Treasury Bond (30YUSTB). One could argue that there is safer sovereign bonds such as the Japanese Bonds (which definitely not are safer) or German Bunds (which maybe are safer, but the Germans could face the need to bail out some of its European colleagues e.g., Greece, Spain, Portugal and Italy, in which case they most likely are not) but that is to be weighed against the less homogenous European market and smaller German market. Hence, I stick to the 30YUSTB.

30 Year US Treasury Bonds

Both the SP500 and 30YUSTB are in their final phases of a Primary wave. However they are not exactly synchronized according to my Elliott Wave analysis which is why there are a few options considering the near future Smaller Picture. The Big Picture is that stocks will fall in 2010 due to the credit crunch which will gain steam in turn due to falling government stimulus. As an effect risk aversion will increase and thus Bonds will rise. This I am fairly confident will happen, it is the timing that is the question mark, and for timing I use Elliott Wave analysis. The way I see it according to Elliott Waves there are a few options.

1. Assuming SP500 and 30YUSTB synchronize their respective high and low, and assuming the SP500 count to dominate then we have that Primary wave 2 may be in or will be in in the near future. However, this option makes the count in 30YUSTB incomplete which is why I am reluctant that it will happen.
2. Again, assuming synchronization, but instead assuming the 30YUSTB count to dominate gives that Primary wave 2 can last for another couple of months considering the duration of  Intermediary waves 1 and 2 in 30YUSTB. This option is possible and would require that stocks continue upwards without significant interruptions. This is actually a big deal from an Elliott Wave perspective since we have reached the end of the road in terms of complexity of Primary wave 2. It is already is a triple combination which is the most complex Elliott Wave pattern in a reactionary wave. In other words, this is not a very likely scenario.
3. Now I assume an unsynchronized chain of events. here, Primary wave 2 in SP500 finish in the near future while at the same time 30YUSTB finishes off Intermediary wave 3. The initial fall in stocks would be met with a similar, but smaller rise in long bonds. It makes good sense since right now the market is convinced that the crisis is over. and thus will take some conviction in order to change its mind again. This conviction will not happen overnight which is why I think that it is possible that 30YUSTB can continue its downward journey a bit further before the market starts appreciating lower risk investments again. Especially in the light of the conventional wisdom that the US dollar and budget deficit is beyond salvation. I too think that it is, but I think that it will not prevent 30YUSTB from experiencing a final grande finale before it turns in for a very long time if not for good.

Baltic Dry Index Update

The Baltic Dry Index (BDI) has nothing with the Baltics to do whatsoever, the name is taken from the Baltic Exchange located in London. Nevertheless, BDI shows a clear slump beginning middle of November.

Data courtesey of Bloomberg.

One might ask oneself the amount of recovery taking place anywhere if transportation is slumping. What goes for both China, Eurpoe and the US is that any recovery not derived from increased government spending would result in an increase in trade and transportations.

Another very interesting item to consider is the traditional relationship with Dow Jones Transportation Index (DJT) and Dow Jones Industrial Average (DJIA). According to classical Dow Theory, the DJT is ahead of DJIA since transportation is where both growth and stagnation hits first. In analogy with this, and considering the BDI's importance to world trade, it is likely that falling BDI also results in a falling stock market some time ahead. BDI's recent history supports this assumption, when considering its peaks in November 2007 and May 2008.

Happy New Year!

A very brief blog looking back at the year that has been and welcoming the year that is.

I started this blog in October with the belief that the surge from March was ending.
That proved not to be the case and the rise since then has been 8.2% in both S&P 500 and SWE 30. Slightly disappointing I must confess, but no-one ever expected that this would be easy. It is also important to rememberthe purpose with wave 2 -- to remove the pessimism among the investor collective, including even the most stubborn of bears. However, my conviction that the rally will come to an end is as firm as ever. While waiting for that to happen I take the opportunity to wish my readers a very

Happy and Prosperous New Year!!!