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April 20, 2013

Up next, a Bounce

Stalled Recovery

According the latest Brookings Institution-FT tracking index of recovery, the global

economy is “stuck in a rut”, unable to sustain a descent recovery. These economic

projections are highly consistent with Exceptional Bear’s Elliott Analysis. Not only is

the global economy unable to achieve lift-off, but once this notion is confirmed by broad

economic data, rather than the expected euphemistic “stalling”, the Market will go into a

tail-spin to dwarf the 2008-2009 plunge.

Funds Flow

As Exceptional Bear forecast over a month ago, funds flow into T-bonds and Emerging

Markets is beginning to materialize as confirmed rising prices. Despite strong financial

markets and a resurgence of false hope in Emerging Market businesses and consumers,

there has been little evidence of bottom line growth since mid-2011.

A Bull Trap!

Emerging Markets are just slightly out of phase, and operating two degrees of trend lower

than developed markets. Although their nascent rally resembles their previous rally,

concurrent with the tanking of developed markets in 2008-2009, this time, Emerging

Markets are a highly treacherous Bull Trap! Linear projections, characteristic of the

highly-emotional “herd mentality”, lead buying & selling at precisely the worst time,

without regard to risk/reward ratios & values. This is certainly no time to be buying

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anything intent on “holding” for the long-term. While Emerging Markets are likely to

have a delayed onset of far less severe “Baby Bear” Markets, like US T-bonds, they are

merely tracing out a “bounce”, within the larger Supercycle Bearish plunge.

Market Patterns Alternate

As we know from RN Elliott’s genius legacy, Market Patterns Alternate, the same

sequence of events never plays-out exactly as the previous time. Meanwhile, investors

invariably project the past event into the future. One blaring example is the obsolete

Bull Market “Buy & Hold” strategy, to which investors became highly conditioned in the

long Bull Market 1982 to 2000.

Even after 13 years of Bear Market, most investors continue to trust that the “long run”,

will eventually secure their financial futures. In the previous Supercycle Papa Bear Market,

of same magnitude ended in 1932, took until 1945 to “get even”, assuming no holding

that went bust, and no withdrawals in the interim, a virtual impossibility. In order to

succeed in any Market we must remain flexible and nimble, in order to rapidly adjust to

changing market conditions. Those remain intractable go the way of the dinosaur. In a

Supercycle Papa Bear Market, like the present, a “semblance of sameness”, imparts false

confidence, and most often leads to catastrophic losses for the greatest number of

investors. That is precisely why safe havens of the 2008-2009 free-fall, T-bonds,

Emerging Markets and Gold, will this time lead investors astray, in sequence, collapsing

like dominos.

Emerging Market shares tend to rise as the dollar falls and vice versa. That’s related to

the relative attractiveness of the dollar vs. commodities prices. In the past, dollar

weakness would indicate “value” and currency appreciation in emerging markets.

Once the greenback strengthened, the flow of capital reversed, moving back into

developed markets. This time, the major difference is that all assets, with the exception

of inverse funds and the VIX analogs, will plunge in a staggered fashion, to previously

unimaginable troughs….once this sequence plays out, the dollar must rise, consistent

with a highly deflationary Supercycle Papa Bear Market.

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So far this year, dollar has strengthened in a short-term bounce currently near

completion, while commodity producers have begun to feel the pinch of lower prices.

China, the major buyer of raw materials stands to benefit commensurately in the short-

to intermediate term. In Emerging Market Indices, China as the second largest global

economy has the highest weighting. What’s more, inflationary pressures in emerging

markets have eased considerably, driven in large part by a 20% fall in food prices over

the past two years, and should continue to abate at a faster clip, in keeping with a

plunge in demand resulting from global economic contraction.

Below is the big perspective Emerging Markets, where the most likely upside is to the

area of 47, followed by a plunge to likely the area of 17.5 on this long-running MSCI

index.

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The TIGER (Tracking Indexes for the Global Economic Recovery) Index combines measures

of real economic activity, financial variables and confidence indicators; proportional to

the degree they are correlated. In this manner, TIGER captures movements of similar

data, as measured on very different basis and across many countries. As you might well

deduce, in the same way in a Panic the “baby gets thrown out with the bathwater”, waves

of fear will ripple through the global economy to contract productivity and consumption.

Treasuries no longer “risk free”

The World’s big investors are back on a feeding frenzy in US Treasury debt. Rather

than reflecting open-ended Fed manipulation, and the prospects of inevitably higher

interest rates, total return on T-bonds has turned up. This is the classic mindset, which

invariably occurs at long-term market tops, which reflects the primitive herding instinct,

which has not changed since the beginning of organized markets. New all-time highs

serve to “sucker-in” sidelined investors, to insure maximum capital destruction.

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In the Weekly 20-year T-bond chart below, you see the magnified completed reversal of

a 30-year Bull Market beginning in 2009. The (A)-(B) Degree of Trend Morphing, is

tracing out a terminal upside in wave (b), to the area labeled “likely range”. Although

fear sentiment could propel this final transitional bounce to an extreme of 92.5,

afterwards, the collapse already under way will plunge off the lower limit of this weekly

chart entirely.

Next in the Monthly Long Bond chart, TLT, you see the (A)-(B) Degree of Trend Morphing

from the long-term perspective, where the orthodox top is labeled Wave 5, seen peaking in

2009. The (A)-(B) above match those below. For the big picture perspective, we must

usually look to non-levered, indices of longer duration. Regardless the implications within

an asset class, hold true regardless of duration and index. Bonds, whether levered or

unlevered, move in tandem.

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Although gold took an exaggerated plunge in lock-step with commodities, the long wick

at the bottom of the final weekly candle below indicates the likely reversal is already in

process. The smaller Diag > ended in 2013, with the larger fractal, requires a dramatic

reversal to the area of 1885, before a subsequent pull-back to the area bound by 1500

& 1625. Finally a terminal spike will likely ending at an all-time high, and be the last

asset class to peak and subsequently nose-dive. This pull-back, similar to the action of a

catapult, merely allows the eventual upside to skyrocket much higher.

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Unemployment & Commodity Prices

A Downbeat jobs report and slumping commodity prices have been erroneously

interpreted to mean slower growth, rather than outright economic contraction. The

dollar, like T-bonds, are globally “valued” by the assumption that the Federal

Government has an unlimited power to tax. However mass unemployment and plunging

real estate prices, will contract Tax revenues, and compound the National Debt in a

parabolic curve, indicative of an economy living beyond its means on foreign credit, no

longer able to support interest payments, realistically like Greece, Ireland and Iceland.

When unemployment spikes to 25-30%, tax revenue shrinks. Just observe the recent

preview seen in the Municipal Bond market. Overextended, and overburdened by debt

load, the threat of default on T-bonds will become very real. In such circumstances, the

imagined becomes a self-fulfilling expectation, as lenders demand higher interest rates

to compensate for the increased risk. Those who manage to hold onto their jobs though

the contraction, will spend far less constrained by the threat of job-loss of layoffs and

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downsizing. The natural outcome of plunging demand is also an inverted multiplier

effect, as retirement and security “nest eggs” vanish into thin air.

Ultra-Low VIX Sentiment really is a Red Flag

As market indices reach record highs, investors remain far too complacent. Under the

guise of low volatility, the $VIX has morphed two degrees of trend higher, in the

identical pattern as the reciprocal long indices.

Market “fear” sentiment has been highly unresponsive of late, as record highs followed

one after another. In mid-March, the CBOE Volatility Index (VIX), a measure of volatility

and fear, stood at a five-year low at 11.05, before inching back up to 12.84. As you see

in our weekly $VIX chart the Diag II in process, heralds a long Bull Market in volatility:

and a corresponding Panic & Crash in Stocks! Ultra-low readings from this “fear gauge”

now raise a red flag. They definitely signal investors that have grown far too bullish, and

fearlessly complacent. Note the identical 2-stage transition as seen inverted as bearish

in all stock indices

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Although the S&P 500 is up roughly 10% year-to-date, the index is showing all the signs

of an exhausted market, with a rise of less than1% over the past month. In sharp

contrast earlier in the year, double-digit daily moves were the rule.

As you see below, the excess over upper estimate for the S&P of 1560, has been

entirely given back, or retraced.

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The weekly view presents a similar topography, with the next leg sooner or later a Papa

Bear FREE-FALL. For a clearer view of these long charts click here.

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In the daily S&P chart, the b wave will likely drop to the area of 1520, as indicated in the

call-out, and by the red-dotted arrow, before the c wave up completes wave ii. At the

bottom of that b wave we will likely want to lighten-up in the inverse positions.

Timer Digest S&P

SPXU Inverse S&P 500; UPRO long S&P 500; Sold full pos UPRO limit 95; cost 85.3

½ pos SPXU cost 34.2 on Fri, Jan 11

Sold half SPXU @ 28.2 Apr 18 off open

Timer Digest T-Bonds

TMF 20-yr. Long Bond; TMV 20-yr inverse bond

Full pos TMV cost 56 (4-2-13)

Sell limit 60 GTC

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TMF average cost 70.38; w/out taking into account the sale of ½ at 75.5

Sold ½ pos TMF limit 70 on Jan 22nd

;

Bot 1/2 pos TMF limit 66; Sold ½ pos TMF at 68.5

Bot 1/2 pos TMF limit 65.21; Sold all at 67

Pension

2/3 pos TMV average cost 49.75

Sell 1/3 pos TMV limit 60

Bot 1/3 pos TMV @ 49.5

TMF average cost 69.19; w/out taking into account the sale of ½ at 75.5

Sold 1/3 pos TMF limit 70 on Jan 22;

Bot 1/3 pos TMF cost 66;

Sold 1/3 pos TMF at 68.5

Bot 1/3 pos TMF limit 65.21

Sold 1/3 pos TMF limit 67

Sold remaining 1/3 pos TMF limit 74

Bot 1/3 pos TMV limit 50

Traders Full pos TMV average cost 49.75

Sell 1/2 pos TMV limit 60

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Bot 1/2 pos TMV @ 49.5

TMF average cost 69.19; w/out taking into account the sale of ½ at 75.5

Sold ½ pos TMF limit 70;

Bot 1/2 pos TMF at 66;

Sold ½ pos TMF at 68.5

Bot 1/2 pos TMF limit 65.21

Sold 1/2 pos TMF limit 67

bot 1/2 pos TMV limit 50

Equity Allocator

35% DRV Inverse Real Estate; DRN Real Estate “One Fund” Strategy

Pension

2/3 pos DRV average cost 22.5

Traders

Full pos DRV average cost 22.5

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35% EDC Long Emerging Markets; EDZ Inverse Emerging Markets

Pension

2/3 pos EDC average price 30.97 (1/9@31.64 + 3/9@30.75)

cost 99.7; Sold 1/3 pos EDC limit 105.89

Bot 1/3 pos EDC cost 98 (3-15)

Sold 1/3 pos EDC at 96

Bot 1/9 pos EDC 31.64 off a limit of 91

Sell 1/3 pos EDC limit 32 GTC

Traders EDC full pos average price 31.05

cost 99.7; Sold 1/2 pos EDC 105.89

Bot 1/2 pos EDC cost 98 (3-15)

Sold 1/2 pos EDC at 96, day’s high was 96.35

Bot 2/3 to equal full pos EDC limit 30.75

Sell 1/2 pos EDC limit 32 GTC (keep in mind the tax consequences of a wash sale)

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30% FAZ Inverse Financials; FAS Long Financials

Pension

1/3 pos FAZ average cost adjusted for split 46.06

Sold ½ pos FAZ at 43

Sell 1/3 pos FAZ limit 44

Buy 1/3 pos FAZ limit 39.4 GTC

Traders

½ pos FAZ average cost adjusted for split 46.06

Sold ½ pos FAZ at 43

Sell 1/2 pos FAZ limit 44 (mindful of the wash sale)

Buy 1/2 pos FAZ limit 39.4 GTC

TZA Inverse Small Cap Stocks; TNA Bullish Small Cap Stocks

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Pension

Buy 1/3 pos TZA limit 37 GTC inverse small cap

Buy ½ pos TNA limit 37.5 this is the long Small cap for the swing trade

(see second chart below)

Traders

Buy 1/2 pos TZA limit 37 GTC inverse small cap

Buy ½ pos TNA limit 37.5 this is the long Small cap for the swing trade

(see second chart below)

This TZA limit is still a ways away, we will cut back on the other allocations to make

room for it

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Alternate Position (a speculation NO longer)

Full pos TVIX average cost 5.0675 (without taking into account the sales)

Sold 1/2 TVIX at 11; Bot back ½ pos TVIX at 7.41; Sold ½ pos TVIX limit 5.9

Bot ½ pos TVIX at 5.0

Sell ½ pos TVIX limit 4.1

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If you have not taken a look at the Weekly Public charts in a while, there are several

upgrades. To view the long-term public charts, to see the additional ETFs added

this week, click here. I f you are a subscriber to Stockcharts, I would appreciate

your vote. There’s a new chart of the small cap stocks, which I plan to compare for

possible inclusion in the allocation…

Eduardo Mirahyes