On January 26 I posted an essay in which I said:
“…the market is in the process of coming to a catastrophic end.” (Newer readers can view the entire essay by scrolling down past this one.)
Shortly after reading my post, a reader emailed me to tell me that a money manager who manages endowment funds disagreed–strongly. The market, he said, was poised for a major rise, due to present conditions, which he described as a “Hundred year perfect POSITIVE storm for equities.”
On January 29th the market began a crash that caused the Dow Jones Industrial Average to fall 2,500 points.
The question is, whose gonna be right?
My assessment of the market is that the crash was the first impulse wave of a new bear market. The present reaction, therefore, is a wave 2 corrective wave. Corrective waves can retrace up to 100% of the first wave down, but not exceed the high. This sometimes happens in slow rolling tops, but I do not believe this is one of those. Should this retracement make a new high, it would mean there is more to go on the bull market. I regard this as a low probability.
Here is how I see it now:
If my interpretation is right, the wave 2 retracement should stop around 25,600, give or take a hundred points. After that, wave three down would get underway and be violent again, crashing 5,000 points or more before the next pause. After that, much, much more decline would be coming. The source of this expectation is the Socionomic Theory of Finance, of which the Elliott Wave Principle is the foundational study. The decline will ultimately be a Grand Supercycle Bear Market. It will be an order of magnitude greater that the Bear market of 1929-1932, which was a Supercycle Bear Market.
On the other side of the argument are investment advisors, most of whom have the same view as the endowment fund manager. Investors Intelligence recorded only 12.6% bears (negative expectations) this month, the fewest bears in nearly 32 years.. The Daily Sentiment Index, an indicator of trader sentiment, hit 90.4% bulls in January, also the highest in the history of this index. According to an E-Trade survey of “experienced investors” in January, 80% of them believed the market would continue to rise. Banks and brokers are 100% bullish. The February investment report from my old firm was titled “Down, but not out.”
Individual investors have the heaviest portfolio allocation to stocks ever, and mutual funds the lowest allocation to cash. The sentiment of all participant sectors in the markets is at bullish extremes not seen in years. These lopsidedly bullish numbers are entirely consistent with major tops.
My allocation is 100% cash. It should not take long to find out who’s got it right.