Published Jan. 01 to newsletter subscribers.
US Economic & Fundamental Condition
The main point with this Price/Earnings - P/E Chart is to show how distorted (overvalued) the stock market has been in the last decade. The S&P 500 Index has been mostly above the red line (overvalued) since 1996. To return to a fair value, (P/E 15) a drop to about 950 is required (as of Dec. 2005). Market experts are predicting that before this secular bear market from 2000 ends, years from now, P/E ratios could drop back to the green line or below (a P/E of 8-10).
Consumers represent two-thirds of all domestic spending in the United States. So measuring consumers opinions is an important part in gauging future consumer spending, and measure economic conditions. High consumer confidence holds up the economy.
Consumer Confidence numbers came in higher than expected in December, 103.6 (5.3 pts, 5.4%).
Chart courtesy of briefing.com
The latest (Nov. 2005) civilian unemployment rate is 5%. This chart (courtesy of yardeni.com) shows the development since 1980.
US 30y T-Bond Yield Chart
shows the development from 1983. Usually, higher yields puts pressure on the stock market. The long term falling trendline from 1988 is still intact.
The Dollar may start the new year with a pullback. It ran into strong trendline resistance at the end of 2005 and Cycle10 is quite toppy. This view is also supported by the weekly Doji candlestick formed in the EUR/USD currency pair, possibly marking a bullish reversal.
A potential weaker dollar is positive for this pair.
According to the studies of longwaveanalyst.ca there are four "seasons" in this 50 - 60 year long Cycle, Spring, Summer, Autumn and Winter.
Stock prices perform well in the Spring with recovery in the economy as well. The last Spring phase was from 1949 to 1966.
The beginning of the inflationary summer is indicated by a peak in the spring bull market in stock prices (Last summer 1966 - 1981).
The end of summer primary recession is caused by the cycle peak in interest rates. This recession is one of the four indicators signaling the beginning of the huge autumn stock bull market.
Four events occur at the end of summer and anticipate the beginning of autumn:
1) A peak in prices
2) A peak in interest rates
3) A bear market in stocks
4) A primary recession
It's the period of rampant speculation in real estate, bonds and especially stocks (1982 - 2000).
Beginning signaled by the peak in the prices of the large autumn stock bull market.
The purpose of the winter is to cleanse the economy of debt via payback, liquidation and usually bankruptcy.
This process creates tremendous stresses to the economy and financial system. (2000 --- >)
The next Spring should again bring growth and prosperity.
4 Year Cycle
More often than not, the 4 Year Cycle bottoms occur at or near larger bottoms in the stock market.
39 Week Cycle
The next bottom is due in March 2006. Chart
The WCA Model (courtesy of wcamodel.com) is an original cyclical method for predicting the US Stock Market.
A 2006 projection for the Dow 30 indicates further advance
into May, given there is no inversion. Should be used with other indicators for confirmation.
Mid & Long Term
Dec. 31, 2004 the OEX
stood at 575.29. 1 year later, it stands at 570, 5.29 points (0.9%) lower.
Monthly MACD is still in bearish mode, after generating a conservative sell signal in October 2005.
Using the S&P 500
as benchmark, the broad market just barely gained ground in 2005, + 36.37 points, (3%) with several significant dips seen on the path higher. Prices have oscillated within a tighter and tighter Rising Wedge pattern throughout the year. Prices usually breaks to the downside from such wedge patterns.
This index reached the key 61.8% Fibonacci retracement level (of the 2000 - 2002 decline) in November and the Dec. trading month formed a Hammer (reversal) candlestick, closing up against this resistance. The high for the month was caused by the upper wedge line.
Trend reversals are often seen at this key Fib. level. Any monthly close above it may delay a top further and if the 78% retracement is ignored as well, a major Double Top scenario (from 2000) could then be the next likely event, long term.
The Nasdaq Comp. Monthly has built up tremendous trendline resistance from Jan. 2002, once again pulling back from it in December, for the third time since 2004. Any clear monthly close above it, could be quite bullish for the tech market, in the months thereafter. On the other hand, if it breaks below strong trendline support instead, it may go for a test of the 50% - 61.8% retracement area (of the 2002 - 2005 advance). That breakout would be a strong signal of where the market is heading in the month(s) thereafter.
A look at a long term QQQQ Monthly chart,
shows that Stochastic has formed a bearish divergent pattern and has left it's overbought zone. The Hammer
looking candlestick up against trendline resistance, smells more price weakness to me.
Two significant supportive Volume spikes were generated during the market decline in July and October, 2002. Currently, there is no resistive volume spike of a similar magnitude that would indicate a long term trend reversal.
So using Volume analysis isolated, the long term market outlook remains positive at this point.
However, when divergences shows up in the New High - New Low Index, it's often a powerful warning for the stock market, so a significant correction first, is a likely scenario. In this case, a triple NH-NL bearish divergence vs. the Dec. new peak in prices, is a strong message about what is soon to come (if not already started) for the market, a correction of minimum mid term degree.
A strong triple divergence is also observed in the MACD indicator, plotted on an OEX Weekly Chart. Strong trendline support comes in at around 550, should the weakness continue.
2006 starts with the 01/03 Gann Angle, (+/- 1 day) convergence.
With a near term bearish trend going into it, it could mark the end of wave 4 at Fib. support. See daily chart.
Using the Elliott Wave Principle, a major five wave impulse structure from the 2002 low, could be in it's last stages. Given the three wave looking, corrective pattern from the Nov. 2005 high, one more move to the upside is not out of the question. If so, that would be the last wave 5, as part of a five wave structure from the Oct. 2005 low.
That could also complete an one degree higher wave 5, as part of a major five wave impulse from 2002. This, in turn, could mark the end of wave A, as part of an huge A-B-C zig-zag from the 2002 low. After the wave B part has ended to the downside, (50 - 61.8% retracement area) a test of the key retracement zone or even the 2000 high in wave C, is one scenario looked for, in the future.
A lower ranked, alternate count suggest that this full A-B-C will end this coming Spring. In this scenario, the wave A ended with the early 2005 high, then ended wave B in October, with wave C now underway to the upside.
As i wrote in the Outlook 2005 Report:
..."The Bradley Siderograph is a popular indicator many traders rely on,
to get an overview of possible larger turning points in an upcoming trading year. It is known for it's inversions, so it's not so good in showing whether highs or lows are coming but more so ... when major highs and lows can be expected. So using other indicators in combination with the Bradley could give useful clues about larger tops and bottoms."...
For 2006 it shows an up trend for roughly the first half and then a down trend into the end of Nov. 2006. However, the forecast into the end of 2005 is most likely inverted, so the 2006 forecast may also be inverted in part or in full. If so, a significant top could already be in place, in line with major divergence patterns.
Chart courtesy of amanita.at
Bradley dates indicating significant market turning points in 2006:
The May 20 Bradley date happens to be in the same time window as the weekly Gann Angle due May 19.
That GA convergence marks 90 trading weeks from the 2004 low and 180 trading weeks from the Nov. 2002 high.
So a larger trend reversal around that date is likely. The mid term directional trend going into it, would indicate a reversal in the opposite direction.
Artificial intelligence (Neural Networks) can be an helpful technique in getting clues of market turning points, months into the future. An example chart from 2005 (look for a 2006 Update in a few days). Inversions can also occur in neural network calculations. In combination with other indicators, it's helpful in finding out when larger trend reversals may occur.
An update of the long term Murrey Math Lines shows that prices are hovering around 50% line, between the major 4/8th - 5/8th MML's. In case the rebound from 2002 continues in 2006, the major 5/8th MML would act as stiff resistance.
Dynamic Gann Levels
When projecting DGL's, the first (23.6%) Fib. level is normally not used in this technique, only the
38.2%, 50%, 61.8% and 78.6% levels. For new subscribers, see the perfect hit (2004 peak) of this rare DGL, projected from the 1994 low. This DGL is still intact after the 2005 trading year and would be strong resistance, if tested in the future. This DGL touched several important highs and lows, from it's projection point.
Fib. Spiral Projections
This Fib. Spiral Projection from the 1994 low is interesting as well. Larger corrections in the past have started
when the OEX met spiral resistance. I.e. the Fall 2002 high came right at spiral resistance, see how it followed
the spiral lower, struggling to break through, which it finally did in early 2003.
Here is another one, a Dow 30 projection from
the 1974 low. I.e. see the perfect hit of a spiral line, before the 1987 crash started.
Projections for Gold and XAU (Gold & Silver Stock Index).
Gold met spiral resistance a few weeks ago and made a pullback. If overcome, it would open up for even higher gold prices, towards the 650 - 700 area.
A long term overview of the Put/Call Ratio back to 1990. When put volume numbers becomes extreme (i.e. above 1) in relation to call volume, it is an indication of extreme bearishness in the market. Being a contrarian indicator, this is usually bullish for the market. The indicator is inverted on the chart.
When call volume numbers becomes extreme (i.e. below 0.50) compared to put volume, it reflect extreme bullishness in the market. This is usually bearish for the market. When extreme numbers shows up, odds are good a larger top or bottom is forming. The Put/Call Ratio is calculated by simply dividing the number of puts by the number of calls. The raw numbers can then be smoothed by using a moving average. A 10-day moving average is used here.
Investors Intelligence Advisors Report
This survey has been widely adopted by the investment community as a contrary indicator and has had a consistent record for predicting the major market turning points. Again, the extremes in investor confidence is looked for, conditions which are often seen at major market turning points. Here is an overview from 1978 to present. Current advisors sentiment is getting quite bullish.
BPI (Bullish Percent) sentiment ended the year at 64.7.
Readings above 70 is considered an overbought state.
Chart courtesy of stockcharts.com
I wish readers and trading friends all the best for 2006!
Please tell your friends about this
Stock Market Outlook 2006 Report.