Letter To A Fellow Trader


Bob Prechter was in town this past weekend for Dick Diamond’s memorial service. Over dinner, he gave me a rundown on his views of the markets. As is sometimes the case, there is room for more than one interpretation in the patterns of the major indices. The analysis I gave last week is still a possibility, but Bob is leaning to one more new high in the DJIA and the S&P 500.

While the secondary averages (Value Line and Russell 2000) traced out five waves in their drops into the August-September lows, the Dow Jones Industrial Average and the S&P 500 Index bottomed in only three, allowing room for more rally. The advance since then has been strictly a big cap affair, with the small caps and the Transports lagging badly.

The good thing about this is that one more new high will clear up the ambiguities in the leading averages, setting the stage, finally, for the bear market we have been preparing for. Bob thinks the final top may come early in 2016.

Meanwhile, the European markets have entered bear phases. The World Stock Index dropped in five waves this fall, and look to be completing a countertrend move of the type I have tried to ascribe our market. The stage is set for Europe to fall sooner than us.

Looking over the recent reports from EW International, it’s clear that the global economic fundamentals are continuing to lose ground. The global commodity markets are a train wreck, and major mining companies are going bankrupt every week. Bloomberg reports that $9 billion of junk-rated debt is coming due in the mining industry next year. Most of it will default.

German prices for raw materials and semi-finished goods have been falling for 2 1/2 years. Hedge funds specializing in distressed junk debt are experiencing losses, liquidations, and outright closings.

Despite relative stability in the global services sectors (if you can live with wage stagnation), mining and manufacturing are the driving forces in economic growth, and there just is no growth in those sectors. It’s just a matter of time before the waiters and bartenders of the world have no patrons to serve.

There is one, perhaps surprising, up-from-the-ashes story in the global markets: Japan. The Elliott Wave folks have certainly called this one right. They called for the end of a 22 year bear market in Japanese stocks in August 2012. Since then that market has risen seventy percent.

I’m not sure, at this stage of my life, whether I want to get involved in foreign markets. I expect the dollar to remain strong and that tends to reduce the ultimate returns. Besides, Japanese stocks have not traditionally paid much in the way of dividends.

So, it looks like the opportunity for the big short sale has to be put off for a bit. Meanwhile, I will continue to trade futures in both directions intraday. Results lately have been good, owing to greater intraday volatility and, frankly, improved performance by yours, truly.

Happy Thanksgiving! Best to you and Jean.



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OF Fractals and other Patterns

Once I had a dollar, once I had a dream,
now all the work is a bein’ done
by a big ole’ machine

—Alison Krauss and Union Station,
Dust Bowl Children

Fractal, per my 1971 edition Funk & Wagnall: n, a geometrical structure that has a regular or an uneven shape repeated over all scales of measurement and that has a dimension (fractal dimension) determined according to definite rules, that is greater than the spatial dimension of the structure.

Dictionary writers love turgid prose. All it means is that a pattern repeats itself within a pattern. Think Russian Matryoshka nesting dolls and you’ve got it.

The stock market, in E-Wave terms, is a fractal. Patterns that can be seen in the daily charts will also appear in smaller time frames. The smaller time frame charts often anticipate the pattern in the larger time frame. This is especially so when the larger trend is an impulse wave. We may be witnessing a first impulse wave followed by an irregular corrective wave in the daily chart that is unfolding in the 60 minute chart, which would anticipate the next strong impulse wave down, setting the stage for the primary direction of the market to turn down:

Dow Jones Industrial Average Daily Chart
DJIA 1 2 patternDow Jones Industrial Average 60 minute Chart
DJIA 60 minNote that the 60 minute chart has the same sequence as the larger daily chart–an impulse wave 1 down, followed by a three wave correction in wave 2. This is a typical sequence in the early stages of a large move in one direction, in this case down. If the 60 minute pattern does not go above the top of the larger wave 2, which peaked November 3, then the next wave down should be a larger impulse wave. This will be worth watching for anyone who still owns stocks. Third waves, even in small degrees of  trend can be dramatic. In the case of a Grand Supercycle top, we may be staring at prices that will not be seen again by anyone alive today.



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To The Moon, Alice!

The ready way to make a mind go awry
is to lace it too tight.

—Coleridge, Notes, Nov. 1801

Well, it looked like the market was going to the moon. Gave hope to the bulls. Worried the bears unless they had the E-Wave analysis, which allowed for one last new high, but gave it low probability.

I like E-Wave analysis. It is based on human behavior, an immutable part of nature. The road to higher prices in investments proceeds apace until large segments of the population get habituated enough with abundance that they don’t mind borrowing to own and maintain more stuff than they need. The move up ends when the debt crushes them.

One of my favorite readers recently said, “Nothing is certain.” My take is that there is a good deal of certainty in human behavior. If something outta happen, it will. Not necessarily on anyone’s timetable, but happen it will.

For some time, the stage has been set for investment values to collapse. We understand that there is no such thing as investment value. There is only the perception of value. For reasons I’ve detailed ad nauseum in earlier postings, no asset class extant will be unaffected.

The proper attitude, it seems to me, is to be open to an economic situation that no one born after 1940 has any familiarity with.

My pastor does not like apocalyptic talk. This is not a forecast of end times. It is an expectation that a hurtin’ is going to be put on the prices of all asset classes globally because the demand for cash will soon have everything for sale.

You will ask why cash will be in such demand. For food, mainly. To service debt, to help neighbors out of work.

Speaking of work, most of the jobs added in the recent employment reports have been for waiters and bartenders. Manufacturing, the mainstay of the nation’s middle class for fifty years is net losing jobs. And, while fast food workers are striking for higher wages, Mickey D. is busy replacing them with self service ordering kiosks and automated hamburger makers.

You will appreciate lower gas prices unless you work in the nation’s oil patch. Worked, I should say. Fracking is rapidly coming to an end, resulting in massive layoffs.

The Fed has just published a report condemning the bank industry’s bad lending practices, stating that Banks have over $3.9 Trillion in risky loans. Most of them will go bad. Before long, most banks will not pass a solvency test. You might have thought that 2008 would have made bankers more cautious. Apparently not, but then, this is all part of the behavior at big tops.

The market action in the recent rise was consistent with a bear rally, which may have ended last week. But, even a rally to one more high will not change the outlook for a full on bear market over the balance of the decade.

In short, there is just no reason to think we get a pass here. Best thing is to be prepared.



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Not So Divine Comedy

Boldness: the Power to speak or do what we intend,
before others, without fear or disorder

—John Locke, Essay on Human Understanding, 1695

We studied Mark in Bible class today. Jesus was asked to tell the folks what the greatest of the laws was. Paraphrased, He said love your Higher Power, guys. With all the strength and focus you can muster. And love your neighbor as much as you love yourself.

Tall orders, the both of them. About half the time I’m in a world of hurt and you want me to do what, HP? When I’m suffering, my self worth is in the ER and I’ll be damned if I can want to have the dude next door over to break bread when I’m sucking wind.

What comes to  mind is the massive sense of humor the Creator has to have. We assume He knows what the hell He’s doing. It follows that He purposely peopled the universe with folks that didn’t know what the hell they’re doing. So He sends His Son down so we can we ask Him what the hell to do. So He tells us.

I make it that, really, He’s saying “This is what you shoot for, people, and it’s long odds that you’ll get there, but soldier on.”

A classmate offers the notion that we are imperfect beings and it is important that we accept it. I’m OK with that, but it is empirically obvious to me that our imperfection creates the demand for improvement. I just notice that I’m worthless without some kind of pain-in-the-ass chore giving me the nudge. In this respect, I truly love my son-in-law, Chuck. Whenever he comes to the house, he walks through the door and says, “Give me something to do!” Super guy.

My pal, Peter, quoting The Buddha, I think, observes that the world is perfect as it is. Lao Tzu said, “Do you want to improve the world? I don’t think it can be done.” Well and good, but, based on how I feel about things, I would say that the world’s perfection is precisely the imperfectness that drives us to get out of bed in the morning and do something worthwhile. When I think to do that, I end up liking myself, which makes liking others fairly easy.

I posit that, in The Grand Scheme, we should be undertaking something that is hard to do. At least I hope that is the case. I aspire to be a competent futures trader. It is said that it takes ten thousand trades to get to competency. I dearly hope this is so. I have 9,800 now. I’m ready to be competent.

Actually, I’m grateful, profoundly so, for the call to be a trader. There is probably nothing I’m more naturally ill-suited for, so getting this far along with it is a great blessing.

I hope that you are equally blessed.




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On Appearances

Order is Heav’n’s first Law

–Alexander Pope, Essay on Man, 1734

Dow Jones Industrial Average 10/21/15
top djia

There, that should do it. E-Wave 2, the pullback from the first wave down in a Grand Supercycle bear market is structurally complete. If this is the bear market we’ve been anticipating, we can expect stocks to turn down forcefully soon.

The first counter trend reaction in a new bear market is often a deep one, retracing a good bit of the original decline, causing consternation all around. The bulls, having seen some of their favorite stocks begin to sag, get some relief, even though they are beginning to question the bull case.

Bears, on the other hand, are running out of patience, having been holding cash for some time. Is this going to lead to another phase of advance? Too cruel for words.

Uncertainty abounds. So I will make the argument for a bearish outcome:

  1. Most of the secondary domestic, as well as most of the foreign market indices have long since topped, leaving the DJIA and S&P 500 as the last holdouts, the same as happened in 1929.
  2. Commodity prices are in deep bear markets, indicating severe slowdowns in the global economy.
  3. Business conditions in the U.S. are slowing perceptively.

Charts of past stock market leaders are decidedly unimpressive. The two most widely held stocks at the 2000 market top were Microsoft and Wal-Mart. Despite recent rallies, they’ve made no progress in fifteen years:

MSFT newestWal-Mart is no better:

Wal-Mart latestWaiting in the wings are today’s faves: Apple and Amazon:

Apple in october 2015Amazon
Amazon october 2015

 Apple’s chart looks very much like the Dow, which is not surprising, since it is the most widely held stock in the world. Amazon is still holding up, but it will be very hard for either one to withstand the bear. These will be the major disappointments of the present era.

I don’t hold much with the idea that history gives us an exact blueprint for the future, but here is a picture that’s hard to ignore:

The Dow now and 1929
Dow now and 1929This picture was taken in 2014. In the interim, the market made one more new high and, so far, has mimicked the early part of the drop in the fall of 1929. The most violent crash was from October 29th to November 6th of that year.

Something to think about.



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Bubble in Galilee

…these are days of lasers in the jungle,
lasers in the jungle somewhere,
staccato signals of constant information,
a loose affiliation of millionaires and billionaires and

—Paul Simon, The Boy in the Bubble

Capitalism sucks. It purports to be a system for organizing economic activity that requires the collaboration of capital and labor, promising to be the petri  dish for innovation and creativity, and the birthplace of wealth creation. It functions best in a political environment that fosters individual initiative.

Ultimately, it’s a giant monopoly game where a few clever players end up with all the property and use their extraordinary wealth to buy politicians who skew governance to favor the few.

The good times last long enough for greed to get out of hand, resulting in an economy bloated with debt and a growing population of economically marginalized citizens. The end game is collapse, wealth destruction, and poverty all around.

The cycle has a long history, as is evident in this excerpt from Reza Asian’s Zealot: The Life and Times of Jesus of Nazareth:

…Capernaum was the ideal place for Jesus to launch his ministry, as it perfectly reflected the calamitous changes wrought by the new Galilean economy under Antipas’s rule. The seaside village of some fifteen hundred mostly farmers and fishermen, known for its temperate climate and its fertile soil, would become Jesus’ base of operations throughout the first year of his mission in Galilee. The entire village stretched along a wide expanse of the seacoast, allowing the cool air to nurture all manner of plants and trees. Clumps of lush littoral vegetation thrived along the vast coastline throughout the year, while thickets of walnut and pine, fig and olive trees dotted the low-lying hills inland. The true gift of  Capernaum was the magnificent sea itself, which teemed with an array of fish that had nourished and sustained the population for centuries.

By the time Jesus set up his ministry there, however, Capernaum’s economy had become almost wholly centered on serving the needs of the new cities that had cropped up around it, especially the new capital, Tiberius, which lay just a few kilometers to the south. Food production had increased exponentially, and with it the standard of living for those farmers and fishermen who had the capacity to purchase more cultivatable land or to buy more boats and nets. But, as in the rest of Galilee, the profits of this increase in the means of production disproportionately benefitted the large landowners and moneylenders (bankers) who resided outside of Capernaum: the wealthy priests in Judea and the new urban elite in Sepphoris and Tiberias. The majority of Capernaum’s residents had been left behind by the new Galilean economy. It would be these people whom Jesus would specifically target–those who found themselves cast to the fringes of society, whose lives had been disrupted by the rapid social and economic shifts taking place throughout Galilee…

Economic crashes vary in severity. The greater the debt in the system, the greater the inequality of the wealth and income distribution, the worse the breakdown. There is the real question of survival in the big ones.

The crash dead ahead looks to be the worst yet. I hope we make it through OK, because capitalism sucks, but it beats any other kind of economy dreamed up by man.



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Financial Planning: the Narrative Fallacy

No event is unique, nothing is enacted but once…;
every event has been enacted is enacted, and will be enacted
perpetually; the same individuals have appeared, appear,
and will appear at every turn of the circle.

–Henri-Charles Puech

The single most egregious flaw in conventional financial planning is the failure to take important capital market cycles into consideration. Every culture, save what passes for culture on Wall Street, understands the cyclical nature of human behavior. Societies, and the financial systems that facilitate them, emerge, grow, and flourish. Then they denigrate, decay, and crash. Afterwards, they start back up again if there is anything worth saving from the collapse. There are times to be fully invested and times when the prospect of significant losses require holding cash.

The Chief Financial Strategist at the brokerage where we keep money market accounts tells clients they need exposure to risk. They do not. They need exposure to opportunity when there is such a thing, and protection from excessive risk when asset prices, like now, are overvalued in historical terms with the global economy burdened with excessive debt.

A sense of history is required to identify the progression of the cycle from an important low to a top and back again. There are a number of ways to ascertain the relative position of markets within the cycle. For me, the Elliot Wave Principal is the most useful because it notes that the phenomenon of cycles has two properties: 1) The very long term trend is up, but when a major cycle tops the ensuing losses are catastrophic, and 2) The overall pattern is fractal, that is, there are cycles within cycles-they occur in time durations as short as minutes and as long as centuries

For financial planning purposes, the two largest cycles must be accounted for: Supercycle, and Grand Supercycle. When either one of these is topping, investors should sharply curtail their investment holdings and hold cash until the cycles bottom again.

DJIA 1930 to now

 Above is the chart of the Dow Jones Industrial Average from 1890 to the present. A Supercycle topped in 1929 and the DJIA lost 89% of its value. It took twenty seven years for the average to regain the level of that top, but the losses were even greater as many of the companies in the average went bankrupt and were replaced by others. Since then, the market has experienced three upward moves and two retracements. These lesser cycles, called Cycles, rose out of the bottom in 1932, topped in 1937 and bottomed in 1942, rose from there, topped in 1966 and bottomed in 1974, rose from there and are now in a third topping area. Three Cycles bring on a Supercycle top. In the present instance, it is also the third Supercycle since the British market lows in 1722, the start of a Grand Supercycle. This top, then, is a Grand Supercycle top, an event none of us has any experience with.

For those interested in how the Elliott Wave Principle operates, I recommend getting in touch with the folks at Elliott Wave International (www.elliottwave.com). When a cycle tops, it retraces back to the level of the fourth wave of the cycle of one lesser dimension. This is why the forecast is that the market will ultimately fall to the level of the 1929 peak, which was 390. Yes, three nine-o, one hell of a drop. Impossible to grasp, much less believe unless you put some time into studying the Wave Principle.

I was discussing this with a long time reader recently. She said, “Well, nothing is certain.” It was a fair response, but she did allow that, despite her very reasonable skepticism, her family’s investment position is eighty percent in cash equivalents. Bravo!

In a vain attempt to put lipstick on this pig, I will say that the species is bound to survive a Grand Supercycle crash, even though most people won’t know what hit ’em. Forewarned is better.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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A Perilous Denial

It is difficult to get a man to understand something,
when his salary depends on his not understanding it

–Upton Sinclair

Charley Merrill closed down the firm in 1928 and recommended that clients sell their stocks. Statesman-like, for sure, but brokers, managers, partners and back office clerks took an unasked for vacation until he re-opened Merrill Lynch in 1933. There is no question today of a voluntary closing of Merrill Lynch, or any other securities firm that I’m aware of. It would certainly be catastrophic for thousands of employees, but it might be a lot easier than the pain in store for the industry and its clients for the balance of this decade.

Yesterday, the Fed did what the market had hoped for by not raising rates, and the response was a twenty minute rally to complete the corrective advance underway since the recent lows-followed by a full retracement of the day’s action and a negative close. As I write this, the futures are down hugely in pre-opening action and the global markets are in a free fall. The idea that the Central Banks of the developing world could stay the long overdue correction of the excesses in debt creation by creating ever more debt has been a Chimera, shortly to be discredited by everyone but bankers and brokers.

Long time readers of this blog know that I do not make recommendations. I write these pieces to frame reality for myself. So, this is what I’m telling myself this morning:

Over the balance of this decade, losses of as much as 90% will be seen in the following asset classes:

U.S. Stocks
European Nation Stocks
Asian Nation Stocks
Emerging Nation Stocks
Corporate Bonds
Municipal Bonds
Commercial Paper
Sovereign Debt
Commercial Real Estate
Residential Real Estate
Iron Ore
Scrap Metal
Almost any tradable asset

What am I holding? Cash.

I won’t mind being wrong. I won’t mind at all. But I don’t expect to be wrong.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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The Cheerleaders

We’re all just walking each other home


Nassim Taleb, author, seminal thinker, and developer of theories that are likely to endure in the field of uncertainty, never reads newspapers or listens to  commentary on current affairs. He holds it is always wrong.

I agree with Taleb. But I do follow news commentary precisely because, at inflection points in the cycle of human behavior, its wrongness consistently confirms my outlook for significant change. At these moments, when all measures of valuation in markets are at extremes, and social mood is at one end or the other of the spectrum, pundits will invariably argue for a continuation of the trend in force.

Typically, after the first big crack in a long advance, commentators rush in to dismiss the drop as an aberration and insist that investors hold their positions. No exception now. The Dow Jones Industrial Average has fallen 19% from its all time high in May to the recent low, and these are some of the headlines:

Don’t freak, Buy Because Stock Carnage Never Lasts
–August 24, 2015, USA Today

The No-Stress Way To Survive A Stormy Market
Stay chill. Market downturns happen. Pay as little attention as Necessary. –August 15, 2015, Time

The Single Most Important Piece Of Advice During A Stock market Crash: Don’t Sell
–August 25, 2015, Vox.com

Worried About The Stock Market? Whatever You Do, Don’t Sell
Here’s what you need to know: Don’t sell. Let me try that again, with greater emphasis: Do. Not. Sell.
–August 25, 2015, fivethirtyeight.com

With a little background checking, a reader can find plenty of reason to disregard this kind of foolishness. The writers are most apt to be inexperienced and way out of their league.

What is more disturbing is that Wall Street Strategists, who ought to know better, are on the same track. The Chief Investment Officer of the firm where we keep our money market accounts, issued a report on August 27 that said in part, “We maintain our positive outlook on equities…” I honestly do not know whether he is being disingenuous or just asleep at the switch. I think it’s the latter:

Asleep at the switch: a term from 19th century American railroading, when it was the trainman’s duty to switch cars from one track to another by means of manually operated levers. Should he fail to do so, trains would collide.

In common usage, similarly disastrous results are implied.


 I believe we have entered the period in which no asset class stands up to the onslaught of a Grand Supercycle Bear Market. There will be rallies, violent ones along the way, but there will be no new highs in the markets in our lifetimes.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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Avoidable Risk

I’m always thinking about losing money as opposed
to making money. Don’t focus on making money,
focus on protecting what you have

–Paul Tudor Jones, Master Trader
(a guy who has made and kept
over four billion dollars in the market)

I lost half a house one afternoon in 1986. I was shorting naked put options, an insane strategy in which you can make a little money if you’re right and lose a ton if you’re wrong. It’s the sort of thing you do when you are dead solid certain of the future. It takes a few of these boneheaded decisions to make you realize that betting on the future is always a wrong thing to do.

The above may sound silly but, the truth is, you do not know what is going to happen next. All you know, if you’re paying attention, is what has already happened. For me, the right way to make investment decisions is to look over your shoulder. What was the last extreme?

The stock market is not a venue where utilitarian decisions hold forth. The super market is: I love steak, but at $20.09 a pound, I can eat hamburger some of the time. If, on the other hand, steak was a stock, the crowd would be hating it at a buck a pound and break down the doors to get it at a hundred bucks. Take a look at the volume on Apple as it went up the chart:

Apple Computer
AAPL volume

The driver for this behavior is fear of missing out. The notable thing about the fear is that it comes in to play well along in the stock’s move. There will be another time when fear brings the volume in. This will be toward the end to a crash in the stock, when fear of loss has the crowd piling out. Most times, the mass liquidation, also called capitulation, happens at the bottom. Logical? Of course: The crowd is always late to the party and late to give up.

This behavior is an immutable part of the human condition: we need confirmation in matters of uncertainty, so we don’t get on to a good thing until we see confirmation in the rise the stock, then we clamber aboard. Likewise, once we buy, it takes a lot of convincing to get us to sell, so we wait until we are almost wiped out to unload.

Obviously, the way to win is to go against the crowd. It starts by waiting until the entire market has been liquidated. That did not happen at the lows in 2009. That’s why we stayed in cash.

Looking over my shoulder, then, I see that the last extreme in the market has been overvaluation, so I won’t invest until the capital market cycle turns down in a bear market that ends in capitulation and a complete high volume liquidation by the crowd. After that, one brief rally (dead cat bounce), followed by a long drifting down to a low where there is no public interest in the market, despite the fact that steak can be had for pennies. The risk will be gone with the departed investors and the cycle can begin all over again.

Action in the market this past week is highly suggestive of my notion that the bear market that will destroy values on the way down to a buy point is now underway. The public is still fully invested. Their advisors are telling them to hold on. Comments like these are spewing forth from brokers across the land:

“In this environment, we advise investors to remain patient, stick with high-quality issues, and take advantage of this bout of volatility to rebalance portfolios in line with their goals.” (Merrill Lynch, 8/21/15)

Comments like these should be prosecutable as crimes against humanity. The global economy is free-falling into depression and bankers and brokers are offering smarmy palliatives instead of the only reasonable advice there is at a time like this: Get the fuck out!



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.



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