Warning II! Counter-Trend Moves Continue to Spark False Hopes
By Tim W Wood CPA, June 19, 2009
The story remains the same. As a result, I feel that it is important to rehash the last article that I posted here a month or so ago. As I listen to the mainstream commentators, the public and even my local news, it is obvious that optimism remains high. William Peter Hamilton, the great Dow theorist who followed in the footsteps of Charles H. Dow, warned against allowing “the wish to father the thought.” I have listened and closely studied the words of many of the reporters and interviewees on the news and there is little doubt that their optimism is allowing “the wish to father the thought.” Wishing and optimism is not the basis for sound analysis. Based on the technical and statistical work that I do, the data is telling me that pretty much all of the moves we have been seeing over the last 2 to 6 months, depending on which market you are looking at, are counter-trend moves. As a result of these counter-trend affairs, the powers that be continue to think that they have the problem under control. The average person on the street sees that the markets are rising and they, too, begin to think that the worst is behind us and that maybe the bail-outs and various stimulus packages are working. It is my opinion that this false optimism and the lust for things to return to “normal” is going to cost the average investor dearly once this counter-trend move concludes. It is for this reason, along with the fact that some of you may not have read this article originally, that I wanted to update and republish it once again here today.
Gold bottomed in October and has moved up some 45% since that bottom. Gasoline was next to bottom in December and has now moved up some 168% into its recent highs. Crude oil followed with its bottom in February and has since advanced approximately 118% from its lows. The CRB index also bottomed in February and is lagging the advances seen in crude oil and gasoline, but is still up 33% from its low. The housing index bottomed in March and advanced 83% into its early May high. I also reported here in the May 15, 2009 Wrap Up that “based on what I see at this point, the Housing Index is at an important juncture and is at great risk of the annual cycle having topped.” Since the early May high the Housing Index is down 22%. Could it be that Housing is about to lead the next leg down again? Have you ever heard of a recovering economy with declining house prices? Hello! The equity markets also made a bottom in March and in the case of the Dow Jones Industrials Average it was up 37% as of the June 11th intraday high of 8,877.93.
Understand I do not allow the “wish to father the thought.” At the same time, I am not a pessimist either. Rather, I am a realist and look at statistics and technical data. The data I’m looking at continues to tell me that the bottom seen in these markets were not THE BOTTOM, but were rather temporary bottoms. The advances out of these bottoms are most likely counter-trend moves and should ultimately be followed by still lower prices. For the record, yes, my cycles work anticipated and allowed me to identify each of these bottoms as they occurred and this is all documented in my newsletters. At present, I must also say that my intermediate-term Cycle Turn Indicator, the cyclical structure of the market and the statistics will again be key in determining if these counter-trend moves are still intact and in identifying their tops. Once the intermediate-term Cycle Turn Indicator turns, the counter-trend moves will be at great risk of being done.
The danger that I see with these counter-trend moves is that they have fostered false hopes. These rallies have offered people the opportunity to recoup some of their losses. But, the longer a particular market rallies the more the false hopes set in. This in turn allows the wish to further father the thought. It is the greed to recover the losses that will ultimately cost the average investor even more in losses. As the advance continues the greed sets in and people wish for more and more of an advance as they hope to further recoup their losses. In the end, the bear market will take back the gift that it has given by these counter-trend rallies. Yes, in the end most investors will find themselves with even larger losses than they had at the previous bottom. The wishful public does not recognize these moves as counter-trend and they will sit on their wishes as the market turns back down and their recovered losses turn into yet bigger losses. One does not have to be blindsided by the coming downturns. It is indeed possible to identify the pending downturn out of these counter-trend moves with the proper technical tools, such as the time proven intermediate-term Cycle Turn Indicator. Sound unbiased technical methods are the only way I know to navigate the ongoing financial disaster that we are dealing with. The politicians, Republican or Democrat, nor the mainstream media warned you of the previous declines because they did not know they were coming, and even if they did they would not have told you. Do you really think they would tell you anything any different this time around?
Guys, we are in the midst of Kondratieff Winter, not the beginning of a new bull market. These counter-trend moves are more like “Indian Summer” and the deep freeze of winter will return. In David Knox Barker’s book The K- Wave, is a brief list of the events that have historically marked the Winter season:
“Global Stock Markets Enter Extended Bear Markets”
This should be obvious to all.
“Trends During Winter: Stocks Down, Bonds Up, Commodities Down”
These longer-term trends remain intact and the recent moves to the contrary are counter-trend.
“Interest Rates Spike In Early Winter Then Decline Throughout”
In June 2004 the Discount rate was at 2.00%. By June 2006 it was at 6.25% and since August 2007 the Fed has been forced to cut the Discount rate back to .50%. So this too, fits.
“Economic Growth Slow or Negative During Much of Winter”
I doubt that many will argue that growth is now slow and in many cases negative.
“Commercial and Residential Real Estate Prices Fall”
This obviously began back in 2006 and there is still much more to come.
“Bankruptcies Accelerate and High Debt Eliminated by Bankruptcy”
This has obviously begun and is no doubt related to the housing and credit bubbles.
“Social Upheaval and Society Becomes Negative”
We are only just beginning to see this.
“Banking System Shaken and New One Introduced”
The banking system is now only beginning to be shaken. There should be much more to come.
“Free Market System Blamed and Socialist Solutions Offered”
This has not yet happened, but just wait.
“National Fascist Political Tendencies”
Just wait, there is much more to come.
"Debt Level Very Low After Defaults and Bankruptcy"
This has not happened.
“Trade Conflict Worsen”
This basically has not happened.
“View of the Future at a Low Ebb”
This has not happened as everyone seems to be looking for the bottom.
“New Work Ethics Develop Since Jobs are Scarce”
If I can assure you of one thing it is that this has not happened.
"Greed is Pruged from the System"
I can absolutely assure you that this has not happened yet.
“Real Estate Prices Find Bottom”
This has not happened.
“There is a Clean Economic Slate to Build On”
Not happened yet.
“Investors are Very Conservative and Risk Averse”
Again, this has absolutely not occurred.
“Interest Rates and Prices Bottom”
“A New Economy Begins to Emerge”
Has not happened
“Stock Markets Reach Bottom and Begin New Bull Markets”
Again, we aren’t there yet.
Tim W. Wood
© 2009 Tim Wood