I'm a big fan of Slope and was intrigued by a comment in your latest missive – "I cannot picture a scenario in which we get above it this year." Perhaps there is. I call it Rally 2, instigated in much the same way as Rally 1, but in a much more compressed time frame.
I am a behaviourist at heart. Once I have digested some of the fundamentals, the technicals, EWs, chart-pattern formations, Dow Theory, Fibs (and trader views such as yours) et al, I put my behaviour hat on.
Elliot Wavers such as Robert McHugh, Karimba, Lamoureux and even EWI's own STU, have expected this June 11 top to be followed by:
– a zig-zag down (albeit on differing wave counts) to a mid/late July bottom
– followed by a final summer surge (or what I call Rally 2)
– followed by Catastrophic wave C down in the autumn.
I know this idea is popular out there, except with Elliot Waver Bill Neely who has called the top as Jun 11, like you.
I am not a conspiracy theorist but I do believe that we have just witnessed some of the strongest market intervention by the President's Committee or the PPT (call it what you will) that we have ever seen. The conditions for intervention were perfect. Loaded up shorts, lower-than-average volume, a weakening USD, bail-out funds sloshing to big banks balance sheets via the AIG conduit, and the outrageous tweaking of accounting rules. It didn't take much buying of the market to drive a short-squeeze that could be put into fifth gear by 'dumb money' and fed by the 'green shoots' brigade.
I expect much of that to happen again. I expect a down towards 7800 in the next fortnight. Shorts will be loading up as the Jun11 top argument gains traction. This is just as we enter the summer doldrums on volume. Next, I believe the USD isn't going to bounce any further than 84 on the index in the coming fortnight. Thereafter, the pressure will be back on (for all sorts of very obvious reasons) and we'll see a falling dollar that's great for stocks (Inflation looms, will be the call). The bond recovery is looking like the dollar too. Renewed pressure on bonds will reignite the yields (inflation looms, will be the call) and drive minds to stocks again. And people will be saying "where's that next rally?". Oh, and "Inflation is looming". Did I mention inflation?
Behaviourally, the mood will be dominated by those not wanting to miss out on 'the next rally'. Many of them did miss out on Rally 1. But not Rally 2. They will be in there early when the very first of the new green shoots appear (what do we call these?). As usual, these will have been planted by the Fed, watered by the big banks, and fertilised by the media. Expect the last week of July and the first week August to be happy blue-sky days on the news tickers. We'll get commodity speculation to kick it all off, and upswings on market-proxy Goldman Sachs. I really don't think it will take much to turn this current mini-reversal and create Rally 2.
But compared to Rally 1, I expect a take-off of rocket proportions – a true stampede for the markets. 1050 tops for the S&P, 9700 for the DOW look like a shoe-in under this scenario. And then the rocket fuel will run out as some piece of macro news, that can't be manipulated, finally makes folks understand what deflation is really all about, and why we need Austrian economics not fiscalism. The plunge will be un-protectable.
I'm a behaviourist and I know things have a (bad) habit of repeating themselves, so I'm for Rally 2.
And I know I may also be wrong. That's why I'm currently 75% cash and ready either way, watching GS, BKX, copper, gold and oil like a hawk.
Thanks for your site.