Letter To A Fellow Trader

Tom,

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.

Cheers,

Rod

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