TSE, is EW wrong? What now?

The basic call coming from EW analysis, my version and that from others,was that from 2007 the market should drop and lose 50/60% of its value. Well before the lows in March of 2009 the bearish scenario became very bullish as it called for a retracement of the previous drop of , again, 50/60%. So in total the call was correct for the first 11000 points. Then the market charged on for another 2000 so far which EW did not , unfortunately , anticipate. As seeing your neighbor making money while you are treading water or worse, is extremely painful and this could pull the hesitant investor into the game, which is no doubt what the market wants. But there are a few good reasons not to buy now!

tselongterm2011

treasuries

In the top chart is the TSE and beneath it the 30-year US treasury in yield terms. I use the US rather than the Canadian as it is much easier to find and the Canadian one would actually amplify the point as our rates travelled a wider range. The point being made here is that the two are highly correlated through the “discount factor” discussed elsewhere in this blog. All you have to do is turn the bottom chart around so that you are looking at it from the back (SeitenVerkehrt). and the correlation is startling. Even the numbers are almost proportionate. Also the individual swings get bigger as the numbers get bigger and v.v.. All this of course does, is anecdotally demonstrate that interest rates are a huge factor in determining stock prices. With a 1.6 trillion deficit how much lower and for how long can the US keep this up (down)?

Looking at the top chart, the green arrows marked X,Y and Z, all 3 drawn vector equal, show that the up leg from the March low is now equal to the leg up into the tech stock bubble of 2000. As of today this is the fastest up move in the 150 year history of the TSE, travelling more in less than 2 years than it did in the first 145 years of its existence! But it does not have to stop here. The next level is where c=a (of the B-wave)at around 14400 (all numbers are monthly!), the parallel trend-line is a few hundred points higher. Then comes the old high at 15000 followed by 16500 where this leg would be vector equal to the preceding two. In between are slightly different levels (light blue) where the vertical distance is equal. The point is that out of the 5 or 6 possible ending levels, the very highest one is at “only” 16500 or about another 2500 points or roughly 18%. All others are much closer.So to get in now to get, say an extra 10% by possible risking 60% is not a good proposition.But then this call could also be wrong!!

By the way, the TMX group (X) itself, has been declared a strategic asset so that take-over/merger is dead on arrival.

TSE

TSE up1

A few days ago I put out this chart and argued that this index could implode any time now. The B wave seems near completion (at last) but if that does not turn the tide we will soon double top (15070, or so) and failing that either the parallel trend-line or the line through the tops at about 16000. Still a long way possible but not in the grand scheme of things. So why are we over-valued at these levels?  Essentially because the Fed. orchestrated every single top artificially. If it was not for Long Term Capital. Enron, Y2K or 9/11 and the associated flooding of the monetary system, these peaks would not occur They are not normal.

Here are just a few examples of what drives the index into these peaks.

nortel 2 2010

Nortel at the peak constituted 30% of the TSE. It was a child of that “widows and orphans” blue chip stock Bell. Most brokers did not recalibrate stock allocations.(the actual high was only $124.55, not $800. But the chart is adjusted backwards for stock splits.

JDS 2011

Lots of people got rich on JDS , most gave it back. Optic fiber  and that sort of stuff that was not well understood. Global Crossing was in the same field.

glw 2011

GLW, Corning. Most only knew this one for the pots that they made for in the oven. They too went into the fiber optics business where over capacity killed the goose very early in the game.

WIN 2011

WIN, with a ticker symbol like this how can you lose? This is Wiland.

There are easily a few dozen more but the point is that you only need a handful of such stocks and you peak well above where you normally would.  You get a little stock tsunami where each and everyone contributes to amplifying the index. Today there are not quite as many high-flyers like Nortel, but there are very many stocks that may be a long way ahead of themselves.

EW and the TSE

 

TSE up2 TSE up1

 

Of course I am annoyed by this market going up 160 points a day, simple because I  (EW) do not like being wrong and worse, not sure that I am. We went down 50 % and up the 50/60% as anticipated, that is like 3/4 right . But we seem to keep going without  rhyme or reason. The question now is do you capitulate and join the mob, or stick to your guns? I would opt for the latter!

      First of all there are more B-waves all over the place that suggest this thing is as ripe as a rotting plum on a hot summer day. Secondly, now that we are close to 14,000 there is not that much upside before we hit the proverbial concrete wall. first at the double top level and then, at the parallel trend-line.  Thirdly, even if we should reach these lofty heights, the NEXT big move is down big time. This is where the Pavlovian dogs excel at being stupid, and I certainly do not wish to join that party.

     What is going to do the trick? At the previous top it was Nortel, which stock then constituted more than 30% of our market. I had a target of below $10  (documented!) when it was at $124. Nokia did the same for Finland. Obviously I did not “understand”. Here the catalyst, I suspect is going to be China. The misallocation of capital is going to ruin them, not in the long run but for the next 5 years or so , starting soon.

    Here on a semi-log scale is the Dow Jones for comparison purposes. One can argue where the actual top should be (2000 or 2008) but in the vast scheme of things it really does not matter one iota.

Dow up

Amazingly, it has done everything EW would have suggested.  Except that the scale of it all seems to be so large. If one adjusted the above chart for the purchasing power of the currency of the US, the market essentially flat-lined for a century. Today we had the first press conference ever given by a Fed chairman, that is in the 100 year plus 3 months history of this institutions conception. For the first time we need not wonder anymore if there is a plunge protection team; the chairman Bernanke nervously confessed today. What we do not know yet is if the world will forgive him. Time will tell.

DOW , TSE and DAX (skip this if you do not care for EW!)

DOW 2011 2 DOW 2011

EW has many drawbacks. You can take it too seriously and than you can be perfectly right but 20 years too early which does not put food on the table. Also these markets seem to be moving a lot more , even relatively, than they used to. Looking at the DOW, it has travelled about 19,000 points in the last ten years. It took the Dow more than a hundred years to get to 1000 and it basically stayed there for 26 years! Counting the waves is an art and the results are often controversial and restated years later. For instance, at one point in time it was thought that the 1987 crash might have been the elusive end of the 5th wave. Clearly it was not. Internally there was dissent in Gainsville , Prechter’s home town when one of the top gurus did not believe that the “tech crash” was the big one. Problem is this stuff can be addictive so you keep trying.

The chart on the left shows the drop in the Dow and the rise back up. The initial drop appears to be 5 waves but in my opinion it can be counted just as easily as a 3 wave a-b-c. Typically 5 waves announce a zig-zag (after a relatively small rebound say 50%, you go down again) whereas the 3-wave structure calls for a flat (where you return close to the top and only then go down again). As a result my guess is that the purple scenario counts best at this time given the size  and the duration of this retracement. The TSE and the Dax, below, best fit that specific count.

TSE 2011 3 Dax 2011

The TSE strongly suggest that the latest top, that is the one in 2008 was THE top, and not the one in 2000 (which is the case for instance for GE). The Dax is less explicit about this issue (it is a semi-log chart!) as the two tops are at about the same level. In fact that chart might even suggest a triangle, but that does not fit with the others as it would imply a different degree. This is the case with the black and red scenarios which assume that we are already in a new bull market- there are numerous reasons why this is highly unlikely.

Make a long story short we will stick with the purple count. Click to enlarge.