Monday Pre Open (Sunday Eve)

Research on how stock markets behave after a change in the Federal Reserve Chairmanship is interesting. There have been five new Chairpersons since 1970. In four of the five cases, within three years of the start of their terms, the stock market experienced a crash. Arthur Burns became Chairman in February 1970 and between 1973 and 1974 stocks saw a 45 percent crash. Volcker was appointed Chair in August 1979 and stocks crashed 23 percent from 1981 through 1982. Greenspan became Chairman in August 1987 and stocks crashed 35 percent in October 2007. Bernanke became Chairman in February 2006 and stocks crashed 53 percent from October 2007 through March 2009. Only G. William Miller became Chair over the past 50 years and no crash followed, however he only lasted 18 months on the job, so not sure he counts. If not, that is four for the past four. Janet Yellen takes over next month as the next Fed Chairperson. If history is to repeat itself, she also will see a stock market crash sometime in 2014 or 2015. That prognosis fits our technical analysis work and cycle work that ideally points to a low around June 2016 +/-1 year.


Leveraged House of CardsAfter the first "tap on the stimulus brake" in five years, let's look at another way to define all the QE programs, especially the latest QE 4 program where the Fed was buying $85 billion of U.S. Debt each month in exchange for freshly printed dollars. This is a systematic monetization of our national debt, a huge eraser, in effect forgiving our debt. Debt is gone, Dollars appear. At this pace the entire national debt, $17 trillion, would be wiped away in about 200 months, or 17 years. Slick, huh?. Once the debt is in the hands of the Government's piggy bank, the Fed, it is gone from the economy, gone from existence, only remembered as a notional memorandum on some Fed accounting report. This magician's trick is a house of cards, a slight of hand, a scheme that will not go unpunished.

Sorry, I can't get the font to match.  We're upgrading the blog software


House of cards you say?  Chart one (courtesy of EWI) shows that investors are "all in" on the upside bet, now betting 10 times as much money on leveraged longs funds as leveraged short funds.  Even the non-lveraged long funds are 5 times more popular than non-leveraged short funds.   Most of this "rush" to lever the herd's bet comes in the last six months, as the indices have formed triangular (loss of momentum) patterns.  So, while optimism is soaring, upside momentum is waning.  It's unlikely this 10:1 ratio will be seen again this century, but its opposite, favoring bearish bets, is a high probability in the next three years.

Oh, and while on the subject of houses, New Home Sales fell in November for the first time in 29 months.  Bravo!  The economy is truly saved.

30 year low in public cash buying powerAnother way to measure the economy's strength is to look at how much "stock market" the herd can buy with its cash.  It can now buy less than 3% of the entire US stock market with its money market funds, as opposed to in 2008 when it could buy 12%, and at the low in 1982 when it could buy 15%.  That shows the buying power of the dollar getting destroyed, making Americans poorer each year.  Remember that argument the past five years about all the cash on the sidelines, and how it's coming into the market soon?  Well, it's likely not coming in, as it's needed to live on.


We've discussed the SKEW Index from the Chicago Board Options Exchange several times over the years.  It's an approximation of "black swan" risk - a large, sharp decline - that options traders are pricing into the market.  On Friday, the index hit 143, nearly an all-time record.  It's so high that it nearly eclipses the worst-case scenario the CBOE outlines in its white paper (page 8).  According to this measure, the probability of a quick drop has tripled from where it was when the S&P was trading at a high in July.

What's so risky about the market?  Well, individuals have pumped their investment accounts up with $400 billion of borrowed money (margin).  That is 100 times the amount that was seen at the 1974 low.  Since that low, the Dow is up 28 times.  So, it's taken 100x the debt level to get the Dow to rise 28x, which is just barely above 25% efficiency.  Add this to the 30 times leverage that investment banks, leveraged mutual funds, and ETF's are known to have access to, and you have an economy that has become "historically and heavily leveraged" to the tune of an estimated ONE QUADRILLION dollars.  Remember how recently we began using "trillion"?  Now, it's so common that quadrillion is the term needed to talk about financial extremes.  Another name for this situation is:  BUBBLE...


all present and accounted forBulls are snorting, and bears are capitulating; throwing in their towels of negativity, and joining the party to the upside. Investors Intelligence just reported that only 14.3% of stock market advisory services are bearish.  This is the lowest percentage in over a quarter-century, lower than at the highs of '00 and '07, and not seen since '87 just before the crash.

When you adopt the "blow off" and "melt up" argument, you have to be willing to go against history that shows NO (none, nada, nunca, zilch, etc.) scenario that the Dow and Spx "melted up" into tops.  Unlike commodities, stocks melt up in third waves, and this is a fifth wave.  Chart three (also from EWI) shows one of the labeling schematics for the rally from the '1974 low.  But, another acceptable schematic is to count the '00 peak as wave 3, the '09 low as wave C of 4, and the rise since then as wave 5.  The melt up ended into the '00 peak, followed by eight (Fibo number) years of "irregular, expanded, flat" correction, which was followed by the last five years of Elliott "thrust" out of the corrective low.  Regardless of the actual numbering and lettering, it's easy to see the difference between the '82 to '00 "melt up", and what has been happening since the '09 low.

Where does that leave us?  As the last chart illustrates, at the peak of the b wave, which should be followed by a c wave to below the low of wave a.  Since our expected EWT/Fibo/Time Cycle "cluster" points to June 2016 +/-1 year, the odds that the next few years will look like a bigger version of 2008 are rising quickly each day.

True, it's believed, after Wednesday's FOMC meeting, that the Fed has "engineered" the perfect TAPERING of the hopium rally of recent years, but it hasn't.  These are the final days of bubble that are rare, but identifiable, and always cause the same outcome; shock and awe selling from out of the blue.

In this "last full week" of 2013, it just makes sense to sit back and enjoy the fireworks, as we will be doing, while fine tuning the entries for the next big market move; the decline of the coming 2-4 years.

Bitcoin.bombA quick look at Bitcoins shows where the herd's mentality is; speculation.  Bitcoins came to existence in 2010, at 2 cents.  Rose in wave 1 to their '11 peak around 35.  Fell in wave 2 to 2 bucks that same year.  Rose in wave 3 to 300 earlier this year.  Fell in wave 4 to around 100 this year, then rose to 1250 in wave 5 last month, completing their first Elliott Wave structure at large degree.  Since that 1250 peak, the last three weeks has seen prices crash to 450 (nearly a Fibo 62% retracement) in an abc pattern, which is likely wave A of a larger ABC correction.  After a wave B bounces higher, wave C should find support between the range of wave 3 and 4 of one lesser degree (per Elliott Wave Theory).  As detailed above, that puts the range into the 200 +/-100 zone.

Like qcom et al was to the '00 peak/reversal/crash, and goog was to the '07 peak/reversal/crash, Bitcoin should become the poster child for the '13 peak/reversal/crash.  This makes the upcoming low in Bitcoin a buying opportunity for generational-wealth building.  Prepare for it, or miss it!

AAPL signed a deal with China Sunday to introduce iphones there next month.  That has the NQ futures up nearly 20 points, and could pop aapl back toward 570 early Monday.

More interestingly, for the first time since the start of this year, dollar speculators have gone "net short".  Each time in the past five years this has happened, a rally followed shortly thereafter.  DSE has been touting the warning NOT to be short the dollar this month, and the action of last week is likely the initial building blocks of the next major rally, especially in the face of the bearishness that now surrounds the currency.

More for Tuesday's Pre Open...

Monday Pre Open (Sunday Eve) by

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Ken Goldberg is a Registered Investment Adviser, and is the president and chief market strategist at Trading With Waves. Connect with me on Google+
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