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 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.

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, 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, 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.

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.

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.