Thursday, December 07, 2006

LT and IT update

I wrote about my long term thoughts in this post a few months back.

I thought i would update my IT and LT thoughts here.

As for the LT, 2003 marked the primary degree wave A bottom and currently based on all the evidence i have, we in a primary degree wave B, which has ways to go before we can call any long term top, which should probably occur between 2009-2010 depending on how the wave progresses.

Within the Primary degree wave B, we are currently in wave 1 of C, which is topping and should lead to at least a 100 point decline on the SPX, by about June 2007. I have shown my primary count in green and there's no reason to change the forecast unless something dramatic happens or the economy weakens significantly beyond what is being discounted by the market. Some fundamental factors are screaming that we are headed, at a minimum for a major slowdown in the U.S economy or worse a recession.

1) 10 year Yields breaking down
2) Inverted yield curve
3) ISM below 50
4) Crude in a confirmed weekly downtrend
5) CRB in a confirmed weekly downtrend

All these significantly increase the chances of a major slowdown in the U.S over the next few quarters. Now what is unknown is the extent or the degree of the slowdown. Based on the larger degree wave pattern in the stock market, this may end up as nothing more than a slowdown rather than a full blown recession. I have an intermediate term target of about $38-40 on the crude oil, again based on the wave pattern, by mid 2007. That also coincides well with a stock market bottom around that time.

The Fed has found the panacea for all ills (or so it thinks), which is the rate cuts. So any slowdown into mid 2007, will be met with aggressive Fed rate cuts. This will not only create a melt-up in the stock market, but also in the whole commodity complex into 2009-2010. OIL could goto $100+ dollars by then, again based on the e-wave pattern. SPX should head to 1640-1800 by 2009-2010. I think this is where the overwhelming inflationary forces will cause the FED to lose control and kick off the deflationary primary degree wave C, which the bears have been prematurely betting on for many years now.

Now if the current slowdown morphs into a full blown recession, the longer term outcome of the stock market would not change, but the IT term would have to be changed drastically i.e a decline into SPX 1020 is possible and that's what i have shown in my alternate count in pink. While i am not expecting that scenario at this point, it's something to keep in the back of the mind. Some major monthly pivots have to be broken before we get there and the monthly MAs have to curl down, before that happens. It's too early to get that beared up IMHO. Again this is all a roadmap just for some perspective not a trading plan.

Feel free to disagree with my outlook. But it is what i am seeing at this juncture.