Both warnings have become reality. So what happens next? As former investors dump their recent purchases, the market is probably coming to a final low for this sell–off by the end of next week, Feb. 15. Accountant Ralph Nelson Elliott in the 1930s identified movements in the stock market happening in a three steps in one direction, two in the other.
When social mood is strong, the Elliottt Wave Pattern is clear. Stocks peaked Jan. 26 around 26,600 on the Dow Industrials. Wave One stopped just above 26,000 leaving a gap on the chart. Wave Two meandered above 26,200. A vicious Wave Three, the strongest of the five, dropped the index to around 23,800. Wave Four re-bounded to just over 25,200. This was the target area we mentioned in our interim update earlier this week. A final Fifth Wave is now in force. It bounced at the previous low of 23,800. Next week should bring a final low under 23,800.
The 2,800 point drop thus far qualifies as a correction. But unless the eventual re-bound can take out the previous high of 26,600, it is likely the nine year bull market from March, 2009 is ending.
Despite what most think the stock market is not necessarily continuously connected to the economy. The stock market is forward looking. Every good thing that could possibly happen was priced in at DJIA 26,600.
This Column, February 6, 2018
We have consistently warned that the Dow Industrials DJIA were some 4,000 points above its widely watched 200 day moving average. Even with a 250 point sell-off this morning the DJIA is 3,500 points over its 200 day MA.
This Column January 26, 2018
Look for energy prices to peak for the time being. All attempts at calling a top in the stock markets have failed thus far. But the actions this week could eventually put the brakes on stock market party
Your humble columnist is not recognized as a geopolitical strategist. But what is happening in the U.S. now reminds me of the decline of Britain as the world superpower from 1880 to the end of WWI. WWII finished Britain off as the power of that day.
Now America has more debt on its books than the annual Gross Domestic Product. And the latest budget deal only adds to that debt. China announced its first based oil futures contract, which will be traded in Yuan, not U.S. dollars. It will be listed on the Shanghai International Energy exchange. This is all part of China and India becoming world players. In the future the U.S. will be a player, not THE player. I suspect that is also part of this sell-off from an all time high. This is a move to compete with West Texas Intermediate and Brent for the world benchmark. And that can only legitimize the Yuan. This is a re-make of the 1944 Bretton Woods agreement that made the dollar the world reserve currency. Except this time there was no meeting.
And the sell-off has taken numerous casualties. The market took Chevron CVX and Exxon Mobil XOM out and shot both in the head. The fact is that XOM simply has not been generating enough cash to fund both its investments and the dividend. This became crystal clear with the latest earnings of both companies. The results were more tax than energy based. XOM is down from $88 to $76. CVX dropped from $132 to $108, now $112.
Master Limited Partnerships have taken a big hit. Nustar NS has fallen from $34 to $25, cutting its dividend to $.60 from $1.095.
I am also concerned that crude oil prices have peaked. The price of WTIC rebounded from its low to re-trace a near exact 50 percent of its fall from $110 in 2014. Technical indicators on the long-term monthly charts are peaking as well. This does not bode well for higher prices. It appears that crude prices peaked in a Fourth Wave from January 2016 to now. That means a Fifth Wave could take prices below the previous low of $25. Natural gas prices have dropped 25 percent in the last three weeks to $2.70.
A month ago we warned that both XLE and XES were turning down. Worse, the energy service ETF XES has never re-bounded form January 2016. The Energy ETF XLE is down from $78 t $66.72. My jury is now out on whether a commodity rally will happen later this year.
Every imaginable reason for the sell-off is being trotted out from what the FED will do to Trump’s tweets to North Korea to you name it. But social mood is patterned by Elliott’s theory. And once the big five moves are done, mood changes quickly. Politicians of course are loathe to accept the idea that social mood is in charge rather than themselves.
The bottom line is to expect a low for this sell-off in stocks around Feb. 15-18. That should be followed by a vigorous rally. The reason is that nearly everyone who wanted to sell stock funds will have done so. There should be no selling resistance to the upside.
Oh, one more thing. There are two really big losers in all this. The first is President Trump who hitched his success to the stock market. The Democrats will be quick to say he owns the sell-off. The second is the planned sale of 5 percent of Aramco. This was to be one of the biggest IPOs ever. That now looks like an increasingly tough sale.
Follow Dennis at http:/www.themarketperspective.com