Great Balls of Fire Expectations

I guess the idea actually goes back to Keynes, himself, if not earlier.  Economists from Krugman (who provides a supporting narrative) to Karl Smith (who indicates relevant expectations can be/are captured in price data*) cite expectations management as some sort of a way to manage and control the economy.  Just today two economists referred to it.

David Beckworth said:

If the Fed were to announce a nominal GDP level target it would provide a big expectation shock that would reverse much of this buildup.  {of a large stock of money assets - JzB}

Beckworth has been pushing NGDP targeting for as long as I've been reading him.  He goes on to explicitly credit  "a much needed shock to nominal spending and inflation expectations.  As a result, there was robust recovery from 1933 to 1936."  He also explicitly states that  "by raising inflation expectations, it would increase the cost of holding money assets for the non-bank public."

I can't say for sure that Beckworth is a New Deal denialist, but I don't recall ever seeing him refer, even in passing, to fiscal policy as part of a solution to the current malaise.

 James Hamilton said:

As far as monetary policy is concerned, the most fundamental ingredient is what the public expects to happen in the future-- managing those expectations is the basic tool that the Fed could rely on in this situation.

In all of these cases, expectations (animal spirits to Keynes then and Elliott Wavers now) determine reality.  IMNSHO, this is dog-wagging on a monumental scale.  So much so, it strikes me as being scarcely at all removed from magical thinking.

I don't deny that expectations can, or might, play some roll.  But to matter for more than some transient period, and in more than some trivial way, reality has to follow suit.  One can expect inflation - as, indeed, many do today, despite there being absolutely no good reason for them to do so - and not get it.  (I expect Valverde to blow the save every time he takes the mound, and I've been wrong on all 40 of his chances this year.)  So - what good is an NGDP target if the Fed doesn't have the tools and the cojones to make it a reality? Beckworth, Sumner  and others have proposed an NGDP futures market.**  Smith demurs, thinking an inflation target is more practical than an NGDP target.

Targets can be missed - the Fed's utter indifference to the employment half of it's dual mandate, while it fails miserably to generate core inflation in the other half, illustrates a lack of both capability and will.  Expectations can be dashed on the shoals of forlorn hope, perverse fate or simple ineptness. 

The expectations-to-reality flow chart is based on ifs and assumptions.  It's a fragile chain that can be broken at any link.  More fundamentally, expectations are ideas.  But it's actions, not ideas, that cause change and generate results in the real world.  (A case in point being the administration of President B. Hoover Hopey-Changey.)

Maybe I'm being overly skeptical, but saying, "I do believe in inflation, I do believe in inflation," is the stuff of Neverland.

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* The strong form, at least, is about 90% of the way to the Rational Expectations hypothesis - which is 90% bull shit.
** This simply strikes me as being bat-shit crazy.
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Wednesday Market Action

The EWI guys figured the 50% retracement of wave 3 at the area surrounding 1228, where I figured 1223.  Either way, the SP500 index spent about 25 minutes this morning above 1228, and even spent 3 minutes marginally above 1230.  From then until now - about 1:45 - it's been at 1223 give or take 3 points.  So far, this has been a very uneventful - shall I say sideways - day.  Unless something interesting happens in the next couple of hours, I'm not going to bother with a chart. 

Update:  Nothing interesting happened.
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Tuesay Market Action

The SP500 index was up today, but not a lot.  It mostly meandered throughout the day, breaking out of the low side of a two-day trading channel.  The action for a couple of weeks now has been within boundaries defined by the 8/05 high of 1218.11, and the 8/09 low of 1101.54.  Today's high sneaked fractionally higher between 3:36 and 3:51, topping at 1220.10 before sliding back to close at 1212.92.

In the most recent several days, we've seen a jump up followed by leveling - which looks rather familiar.  

FWIW, I've suggested support/resistance bands in the area of roughly 1200 to 1210-ish a few times already, and just for kicks drew a curve along or near the peaks (blue.).  Elliott wavers who actually know what they're talking about are calling the counter-current move from the 8/09 low a double zig-zag. (Figure 12 at the link.  You'll need to mentally invert the picture - it is illustrating a downward correction, while the current one is upward.)  This move should be getting close to completion, possibly near the 50% retracement I mentioned yesterday - unless it turns into a triple zig-zag, which is also possible.

Momentum peaked early yesterday morning and has been slumping since.  Could today's high have been a top?  Tune in tomorrow for more exciting action.
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Is the Phillips Curve Valid?

In comments Art points me to this post by Noah.  I was familiar with it, because Noah is one of my favorite bloggers (see the right sidebar.)   Noah illustrates the shifting nature of the Phillips curve over time.  This made me wonder if it really is a valid way to look at the data.  I replotted the 1966 to 1981 CPI and unemployment data from my Not the 70's post, Phillips style, and looked askance at it.  Notice how Noah assigns the data points to the various curves: '75 with '80 and '81; '82  and the early 90's with the early 70's;  later 90's with the late 60's.  So the shifting seems a bit capricious.  Or maybe I'm just disorientated by the time travel.

This Philippianism strikes me as forcing the data into preconceived packets, not letting the data drive a conclusion.

My quasi-Phillipian chart has Excel-generated best fit lines through the same monthly data I plotted earlier, grouped by time, more or less per Noah's groupings.  The difference is that I kept '75, frex, in the same group as '74 and '76, rather than inexplicably plop it out with '80 and '81.  My groups are 1966-69 (pink), 1970-73 (yellow), 1974-79 (red), and 1980-81 (purple).  Note that each later time packet is farther to the right and higher.  I've also added a best fit line (blue) for the entire 1966-81 data set.  Except for the 1966-69 set, the R^2 values are pretty ho-hum, and the straight blue line, which illustrates inflation and unemployment rising together - and thus totally contrary to Phillipian thinking - is only slightly worse than the others, and actually quite a bit better than the red data set.

My point here isn't to try to disprove the Phillips curve.  It's to illustrate yet again that the late golden age period, characterized by unusually high inflation, is different from other times before or since.

Art also asks why the peaks were increasing with time in the earlier graph - an observation you can also make here.  This might be kicking the can, but I'll say they increased because underlying inflation was increasing.  The post-WW II period up through about 1980 was a time of secular inflation.   Other effects were superimposed on a rising baseline, and that might confound cause and effect relationships.   Since then, we've had disinflation, and are now at the edge of actual deflation.

Near as I can tell, nobody understands that, either.
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This Is Not The 70's

The typical relationship between unemployment and inflation is contrary (so to speak.)  High or growing unemployment is usually associated with low or falling inflation.  Such is the case now, to an extreme level.

A historical aberration occurred in the late 70's, when we had high unemployment and high inflation together. The name for this condition was the cleverly contracted portmanteau, STAGFLATION.  This is qualitatively defined as a period of high inflation and slow growth.  I haven't seen a quantitative definition, so I made one up.

Stagflation:  An economic realm characterized by unemployment that is above the long term average level, coupled with inflation that is more than 1.5* the long term average level.  For the period January, 1948 through April, 2011, these average values are 5.7% and 3.72%, respectively.  The CPI benchmark value is then 5.58%.    Coincidentally, these values are so close that they collapse to a single horizontal line on the graph below.   CPI inflation, 12 Mo RoC, is in green.  Unemployment is color coded in Blue and Red, by president's political party. 

My definition is arbitrary.  Feel free to pick one you like better.  But it is easy to see that the stagflationary period of October, '74 to August, '82, is unique in the post WW II era, though there was a near miss in December, 1970, when the two criteria crossed right at the defined border.

Inflationary peaks occurred in Feb. '70, Nov. 74, and Apr. '80.   Unemployment made a high, broad peak at 5.9 to 6.1% from Nov. '70 through Dec. '71.  Other sharp peaks followed in May, '75 and Dec. '82.  During this period, the typical contrary motion did not occur.  Instead, the two measures moved more or less together, with inflation peaks leading unemployment peaks by 6 to 30 months.
 
As a side note, you can see that every Rethug administration leads immediately to higher unemployment.  It's mixed with the Dems.  Kennedy-Johnson and Billy-Bob both brought unemployment consistently down during their administrations.  Carter gave us a down-up sequence, and B. Hoover Obama might give us a down to follow his initial up, if he is extremely lucky.

But, since Obama is an Eisenhower Republican, and the Fed is powerless to fight deflation, I'm not going to hold my breath.
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Monday Market Action

European markets were mostly up, and the U.S kept it going at the opening today.  The SP500 index quickly jumped up to above 1195, and is now hovering in the range of 1197-1200.  This now all appears to be within wave 4, coming off the wave 3 bottom of 1101.54 on 8/09.   I had trouble identifying that at the time, thinking subwaves within wave 3 might be continuing.  While that is still possible, hindsight now suggests that 1101.54 was the end of wave 3, and the start of wave 4.   Wave 2 was a pretty simple zig-zag from 6/16 to 7/07, so a more complexly structured wave 4 is to be expected.

On 8/15, I imagined  a support/resistance line in the range of 1200-05.  That might be in play.  I won't have time for a chart this evening, but I will get in some more commentary.

Update:  Not a lot to add.  The index crawled up the rest of the day to end at 1210.08, against flagging momentum.  This is the highest value since 8/05.  

Possible retracement values of the entire wave three drop would be as follows:



Clearly, the .33 and .382 landmarks are out of play.  For now, 1223.5 is a possibility.  Even 1252 is not out of the question.  That's about it, though.  Wave 1 ended at 1258.07, and per Elliott rules, wave 4 cannot overlap wave 1.
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Ad Hoconomics

In the early days of the Other Great Depression, the Roosevelt administration tried out many ideas - some good, some better, some awful - to help America out of an economic nightmare that nobody understood at the time.  This scattershot approach seems to fit both definitions of ad hoc, when used as an adjective:

1. Formed for or concerned with one specific purpose

2. Improvised and often impromptu

Fair enough.  Keynes didn't publish the General Theory until 1936.

In a Financial Times article* quoted extensively by DeLong, John Kay makes this remark about the first generation of Keynesians, who engaged in ad hoc-ery in trying to determine the consumption function (not this), "which related aggregate spending in a period to current national income," and thus get a handle on the multiplier effect:

But you would not nowadays be able to publish similar work in a good economics journal. You would be told that your model was theoretically inadequate – it lacked rigour, failed to demonstrate consistency. To be “ad hoc” is a cardinal sin. Rigour and consistency are the two most powerful words in economics today.

Kay concludes:

The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it.

This is a damning indictment of macroeconomics, as practiced by the neoclassical school.   I level this criticism specifically at them, since the opposing Keynesians seem to have rather useful models, and - more importantly - are not bound by giving more credence to the model than they give to the real world.   And perhaps most importantly of all, Keynesians are either roundly criticized as idiots, or simply ignored, and have no influence on current policy.  Neo-classicists and their near equivalents, whether of the Chicago, Austrian or Libertarian persuasions, are the opposite: if the model conflicts with reality (as it sooner or later must, models always and everywhere being simplified and therefore inaccurate approximations) then it is reality that is somehow wrong.  And these are the Very Serious People who determine and influence policy.

A criticism of Keynesian economics is that it was unable to anticipate the stagflation of the 70's.  That's true, it wasn't.  It's funny, though, that neo-classicists, who were also equally clueless about stagflation (though I guess Friedman and Phelps did have a clue) had - and still do not have - any explanation of the high employment of the 30's, and of now, come to think of it, other than the "Great Vacation" theory.

In 1970, Keynes had already been dead for 24 years.  A more vital Keynes perhaps would have made an attempt to analyze, understand and explain stagflation.  That was his approach to difficulties 40 years prior, anyway.  The thing to remember about Keynes is that he did not overthrow the edifice of economics as it existed in the 30's.  He expanded it to include realms that were otherwise incomprehensible.  It's reasonable to assume that he would have done the same in the 70's, had the rather inconvenient passing-away not long since intervened.

The problem with conservative economists of all stripes is not that they are always wrong.  As hard as I am on them and their models, they get some things right, some times.  The problem is that they give full credence and dependence to contrived "comprehensive and universal descriptions of the world" and little or none to contrary facts and data that actually occur in the world their models so inadequately describe.**   Hence, they do not recognize that the universe of economics contains different realms, and that when in these different realms, different policy solutions are needed.

Austerity is right in certain times and places, but not at a time and place when unemployment is high and interest rates are bumping against the zero interest boundary.   That they refuse to acknowledge the need for fiscal stimulus, or even that the zero interest bound is of any relevance is quite telling, ispo facto.

The Keynesian solutions were tried in the 30's, and they worked.  It is quite likely they would work today, if there were the political will to employ them, rather than Very Serious (and Very Painfully Destructive) Austerity.  And, since they are tried and true methods, there would be no need for an ad hoc approach.
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* You have to register with FT to read the article - but go ahead:  it's free, and worth it!
** The 4th pillar of the conservative mental process manifests itself as some sort of denial of reality.
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What the Hell?!? Friday - Economics and Space Aliens

Typically, the right wing has willfully misinterpreted Krugman's little thought experiment about the expansionary effects of an alien invasion.





Big surprise.  Conservatives are typically humor impaired, irony deficient, and lacking in imagination.  All that besides being liars.

Coincidentally - or not - Mark put up a post with a series of scatter-plots relating GDP to various debt measures, and spiced it up with quotes from the 1986 (Reagan admin - another coincidence?) movie ALIENS.

Here is the second graph in Mark's post.

Does it remind you of anything?

How about this?

Another Weak Week in the Market

Oh, No! Big Ben let us all down. His ho-hum 10:00 EDT speech caused the markets to fall.  Never mind that the SP500 gapped down at the opening and made a big spike up - 14 points or so, as of 10:35 - that started shortly after 10:00.  As I said yesterday, people get paid to make this stuff up. Anyway, the surge of the last several minutes is counter-current, and the move down from yesterday's opening looks very much like an impulse.  All of that, and more, should be given back by the end of the day.  I'll post a chart after closing.

Update:  I highlighted a phrase from this morning's start to this post, because it was so spectacularly wrong.    I live-blog the stock market as an exercise in personal humility (as if playing the trombone weren't enough.)  Interestingly it seems Bernanke buoyed up the market after all.  Go figure. 

The SP500 made a jagged climb up to almost 1180 shortly after noon, then broke out of its trend channel and spent the rest of the day quivering around 1175, the failed support line from 8/18, before closing at 1176.8. This is touted as the best market gain in two months.  Which is rather curious, since the index has been wiggling sideways (still or again?) in a collapsing band since the 8/05 high of 1218.11 and the 8/09 low of 1101.54, without covering any new ground.   Today's action was contained within the range of the previous two days.

On Tuesday, I said - "A rise above the subwave i low of 1184 calls this wave counting into  question; and if 1208 is topped, it all goes out the window."   Except for a quick needle thrust to 1190 yesterday morning, this is holding, for whatever that's worth. 

Anyway, here's a chart for the week, courtesy of Yahoo Finance, with my mark-ups.

The sideways motion can continue for a while, but not forever.  Nothing yet is suggesting that the main direction is up, so my bearish stance continues.
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Where Is the Dollar Going

A couple of weeks ago I foolishly boldly made a number of predictions about certain economic indicators.   One of these was the dollar index.   We haven't looked at it since the beginning of the year.  This is a good time, since Menzie Chin has a long post on the subject today.   Menzie wishes for continuing depreciation "to effect global rebalancing."  He includes a lot of graphs, but none of them provide a detailed look at the results this year.  FRED to the rescue.

We see a not-particularly-neat down-slanting trend channel (green) to an all-time low in April.  After that point there's a jump to the top of the channel, and a dance along the top line through mid-Summer.  In the last few weeks, the Buck has drifted sideways, with most of this action happening in a new trend channel (purple)  that I am imagining. 

Menzie's post includes an excerpt from a paper by Catherine Mann of Brandies University. She concludes that a variety of factors, including "a long-run chartist view, suggest that the trend dollar depreciation has reached an end."

Well, there's the chart, I guess.  At least I'm not alone in my assessment.  If the dollar pops convincingly through the top of the purple channel, it could rise for quite some time.
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Thursday Market Action

Wow.  The SP500 popped up to 1190.68, a new 10-day high, in the opening moments.  Then the bottom fell out, as expected.  Nothing in the 2+ day long climb looked like an impulse.  The early stages of the next phase down certainly do. 

Gold and oil are down today as well. 

At the end of the day, look for all of this to be connected to some exogenous event in the news.  People get paid to make that stuff up.  Be skeptical.  As weird as it seems, the market moves to its own rhythms, and the invisible hand belongs to Fibonacci.  1190.68 is within a point of 1189.78, the .786 retracement of the drop from the 8/17 intraday high of 1208.47.   What's so special about .786?  It's the square root of .618, the golden ratio.  Why should that number have any significance?  Beats me.  But when there is a steep retracement, beyond the .618 level, that is a pretty typical stopping place.  I only observe and report.  More at the end of the day.  It should be very interesting.

Update:  Not so interesting after all

Gold rebounded and wound up positive for the day.  Oil gyrated and wound up slightly negative.

I'm taking the SP500 low of 1155.47 at 12:53 to be the end of the low level impulse wave (1) that started with the early morning slide from 1190.68.  Since then the index has bumped its head against 1166-1167 four times, and bounced back down each time.  This is a very messy looking wave (2) which might have ended with the last bump at 3:21 this afternoon. On the 5 day interactive chart at Yahoo Finance, MACD peaked early yesterday morning, made a lower peak at today's early top, and has slumped badly since.   I'll wait till tomorrow to post a chart here. 

Evidently a lack of newsworthy events allowed stocks to slide today - as if it takes good news to buoy them up, and Bernanke's impending speech tomorrow will be the savior of equities - or not.  With a hurricane out there, Libya toppling, Europe extending the bans on short sales, and Harrisburg, PA in the red, this strikes me as a failure of imagination.

Nevertheless, “Headlines are making stocks jump quite precipitously,” said Sal Arnuk, co-manager of trading at Themis Trading. “However, the real action will be watching Bernanke tomorrow.”  Investors are looking ahead to Fed Chairman Ben Bernanke's Jackson Hole speech on Friday, in hopes that he may announce some form of monetary policy to help support the U.S. economy.

Yeah.  Well, good luck with that.

Update 2:  News is what does it, fer sure!

Zemsky expects to see more big swings as long as the fear of recession hangs over the market. "People are trying to adjust their positions to news," he said. "Once it's clear where the economy is headed, I think things will calm down."

Why Do Conservatives Lie?

Art chided me in comments here for calling Steven Moore a liar in the aftermath of his lying screed at the WSJ.  I had only read enough of the liar's lies to assure myself that he was lying, and pulled some damning quotes.   In response to Art, I said this:

I think that when you can find someone lying repeatedly, and that person has a public forum, it is vitally important to call him exactly what he is - a liar.

The entire edifice of conservatism is based on lies. Consider, for example, the "miracle" of Texas, WMD's, the lump of labor "fallacy."

Etc, etc and so forth.

And look at the "so forths": Obama, the most liberal member of the senate according to McCain in '08, is a Kenyan Muslim socialist who wants the terrorists to win, The Stimulus failed, Obama has tripled the national debt, Krugman is a war monger, the country is bankrupt, the ACA and raising taxes on "job creators (a lie within a lie)" will harm the economy.  Acorn promoted pimps.  Global warming is a hoax, and Climategate proves it.  Conservatives routinely attribute non-Keynesian ideas to Keynes, and then ridicule their own lies before an ignorant and credulous audience.

This morning I heard a clip of Dick Morris on Hannity saying that Libya is the next Iraq.  Never mind that American casualties in Iraq number 4474 as of 7/18/11, with 94.7% of them occurring after the lie of "mission accomplished," while American casualties in Libya number ZERO!   Or that the Libyan unpleasantness is a genuine popular revolt while the Iraq unpleasantness was a wobegon exercise in American imperialist over-reach.  Other than that, the circumstances are rather dissimilar.   This is the classic conservative ploy of false equivalence.  Tux elaborates.

I have already dissected lies from the Heritage Foundation and conservative economists like Scott Sumner and Russ Roberts.  (The Blogger Search function is inop AGAIN, making it more trouble than its worth to track down my links.  You'll have to trust me - but that's OK.  I'm not a lying conservative.  UPDATE: Search is now inexplicably working again, and I have supplied the links.)

Some imposter named Carlos Graterol put up a bogus Krugman account on Google+.  On that account, he said things that Krugman never said or would say, in an attempt to make Krugman look bad.  In the aftermath, he remains impenitent.   He's actually proud of what he did.  In comments, one of his fawning supporters goes so far as to say: "Well Done! You made some great points while pointing out the foolishness of leftism, and have taken responsibility for it in a way only conservatives ever do…honestly. Again, Well done!"

This is particularly illustrative.  If you've paid any attention to Krugman, Rachel Maddow, or me, you'll know that when we get it wrong, we own up to it.  Why?  It's simple - we're honest.  You'll also know that we are careful to get the facts straight before we spout off, so - though we are human and therefore imperfect - we don't get things wrong very often.  A conservative, on the other hand, when caught lying, doubles down on the lie.  

Update:  At HuffPo, Jason Linkins does the near equivalent of a DEEP STUPID treatment to lying liar Carlos Graterol.  There is a video of Krugman included as a no extra charge bonus.  H/T to the LW.

Conservatives lie.  They lie all the time, and then they lie about their lies.  Though it is now commonplace among even mainstream conservatives, it has always been so on the right lunatic fringe.  Back in the '50's, when I was in grade school, Robert Welch, the founder of the John Birch Society, said that Ike was a communist sympathizer.   Now, the right wing lunatic fringe has become the mainstream.

Why do conservatives lie?  It's really quite simple.  They lie because the truth is not favorable to their point of view.  They make shit up because facts and data seldom support their opinions, and most typically reveal them to be unworthy.  This is the well known "liberal bias" of reality.  Conservatives lie because the truth does not serve their purposes.

And that's the truth.

Wednesday Market Action

The SP500 index jumped right up this morning to 1175, the .618 retracement level, then retreated.  This move has been dramatic, but does not look like an impulse wave.  That's not to say it can't go higher, but a turn down here would fit my narrative very nicely.

In the press of other things this evening, I won't have time to post an end-of-day chart, no matter what happens.  I'll probably get more commentary in before closing, though.

Closing Update: Hmmm.  The index popped up to a new intermediate high of 1178.55, and ended at 1177.60, just an eyelash above 1175, for a 1.3% gain on top of yesterday's 3+%.  Still, upward momentum peaked early in the day, and has since waned.  Have a look at the interactive chart for ^GSPC at Yahoo Finance.  Pick "5 day" from the time choices below the chart, and select MACD from the drop-down menu of technical indicators.  Momentum peaks rose from Monday morning through today's early going, and are now falling off.  Eyeball a channel around the rise, and you can see that prices have moved sideways and are now outside of it.

This mental exercise is all probabilistic, not a sure thing; but upward momentum seems to have peaked.  I expect action tomorrow to be on the down side.

In other news, I see gold is down 61 bucks today.  Contra the linked vid, I do not support buying either silver or the miners.  Look what happened in Moria.
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Tuesday Market Action

I wasn't going to post a chart of the SP500 until the end of the week unless the trend channel was broken, and that happened today.   This completes the five wave impulse of some minute cycle, and a corrective wave is now in progress.

I've labeled subwaves i through v.  The complete drop from Wednesday's high of 1208.47 to yesterday's low of 1121.09 (narrowly beating out Friday's 1122.05) covered 87.38 points.  Today's closing high of 1162.35 is within 2 1/2 points of the 50% retracement of the entire impulse.

(Note my typo in the chart.  The wave label at the bottom of the channel should be v, not iv.)

Simple chart from Yahoo Finance, all the folderol added by me

A new channel is trending up at the moment.  Coincidentally, the 50% retracement at 1164.78 is right in the middle of a support-resistance band I noted back on the 12th.  It seems the 1120-1130 support-resistance band from the 8/12 chart might also be in play.

Despite the tidy trend channel containing subwaves iv and v, the actual charted values are a bit of a mess.  Regardless, the subwave 5 bottom is in, and the corrective wave might be close to over.  If not, the next potential top would be at 1175, the 61.8% retracement.  This is also the failed support level from last Thursday morning.  Curiouser and curiouser.

Remember, this is all part of the development of wave 5 down from the 7/07 top.  A rise above the subwave i low of 1184 calls this wave counting into question; and if 1208 is topped, it all goes out the window.

Update: S&P Equity research chief investment strategist Sam Stovall offers a very bearish assessment.

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Monday Market Action

I drew a trend channel on Friday as if the early morning SP500 peak were outside the channel.  That was a mistake.  Redraw the channel line with it touching the peak, and still parallel to the bottom channel line, and it touches today's initial jump up as well.  Since then, the index has drifted down a bit.  So far, we've been in that downward-sloping channel since shortly after 10 a.m Thursday - now, at a bit past 10:30 on Monday, this covers the equivalent of two full trading days.

This still looks like subwaves of 5 developing.  The entire wave should be days to weeks infolding.  More after closing.

Update (after closing):  Not much to add.  Today's action was contained within Friday's action.  This looks like another sideways day - but not really.  The index hit the bottom of the channel at the end of trading on Friday, then opened at the top today, and snaked around the channel midline for most of the day.  I can't read these waves, except to say that the down trend is continuing.

Update 2:  A little peek behind the numbers.

"No major economic reports came out Monday. Later in the week, traders will be sorting through figures on new home sales, chain store sales, durable goods orders and weekly claims for unemployment benefits to see if another recession could be on the way. The government will also release revised figures for second-quarter economic growth Friday. Another significant revision downward could alarm investors.

Three stocks fell for every two that rose on the New York Stock Exchange. Trading volume was above average at 4.8 billion."

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Doing the Wave

In comments here, Art asks about the significance of wave 3 vs waves 4 and 5.  As a rank amateur wave-rider, I'm no Elliott pedagogue.  You can get a primer on Elliott Wavery here.  For now, suffice it to say that Elliott wave analysis is a protocol for assigning order to the apparent chaos of movement in financial markets.  In this system of order, movements fall into repeating patterns, as Art alludes to here.  But in the real world, things are never really simple.  The patterns repeat in a generalized way, not often in ways that are super-imposable with some scale factor - although that is sometimes the case.

They also repeat at various levels of trend.  Strip the time scale from a stock chart and there is really no way to tell if the scope is an hour, a day, week, month, year, decade, or century.  A pattern that repeats its general form at all levels of magnification is called a robust fractal, and that is a pretty useful way to think of the stock market.

Ralph Nelson Elliott devoted a big chunk of time to studying the historical movements of stock prices, and discovered the wave patterns that bear his name.  Briefly, the current main up or down thrust of the market takes the form of an "impulse" wave.  The impulse is divided into 5 subwaves of alternating direction.  Waves 1, 3, and 5 are in the direction of the impulse (either up or down,) while waves 2 and 4 are counter-current, or corrective, and fight against the main thrust of the impulse.

Waves 1, 3, and 5 - since they are in the direction of the impulse - are also impulse waves, each with its own 5-subwave structure at a level of trend that is one degree lower.  At every level of trend there are relationships that occur probabilistically among these waves.  Wave one is often the smallest.  Wave three is NEVER the smallest, and is often the largest.  The lengths of these waves in price terms are often related by Fibonacci ratios: wave five might be 0.62, 1.00 or 1.62 times the length of wave 1, for example.  Even to a rather casual observer, the directional thrust of an impulse is often quite easy to discern.

Waves 2 and 4 are more dicey in their form and interpretation.  Since they are going against the impulse, they struggle, and that can give them complex contours, with no easily identifiable shape or direction other than sideways.  In fact, Elliott was the first to recognize that a large scale sideways motion is a bear market manifestation (since the highest level trend is up.)  Ulimately, waves 2 and 4 can each be resolved into a 3 subwave pattern, with the subwaves labeled A, B, and C.  So, its numbers for the impulsive waves, letters for the corrective waves.

One of Elliott's "rules" is the principle of alternation.  If wave 2 is a simple A-B-C, then wave 4 will be complex, and subdivide in ways that I will not attempt to describe.

The numbers that are most important in Elliott Wave analysis are Fibonacci numbers and Fibonacci ratios.  The retracement of a 2 or 4 wave is often a Fibonacci fraction (.382, .50, .618, etc) of a related impulse wave.  Third waves are generally the big movers, which is why I highlighted the third wave that started this conversation.  C waves are also third waves, and when they point down, can be devastating.  There's a lot more to it than this, but I hope this simple explanation is helpful to anyone who wants to understand how I interpret the market movements.
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What the Hell ?!? Friday / Quote of the Day, with a (possible) hoppy sip of neoliberalism

Perhaps there is some Bierstalinismus Fraktion out there, which believes that the proletariat will never be fully realized as a class-in-itself until it learns to appreciate hoppy microbrews, but which has reached an accommodation with neo-liberalism in which these joys are reserved for the revolutionary vanguard.

Also sprach Henry Farrell at CT.  He also supplies links and context, lest this heady kerfuffle be totally inscrutable.

In case anyone is wondering, I really do appreciate hoppy microbrews, and will seek them out, when it is not terribly inconvenient.
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The Market This Weak Week

Except for a 40 minute episode of repelling rapelling at yesterday's opening, the week was pretty uneventful.  Following a stunning lack of support from the 200 day m.a. at 1285 back in wave 3, the former trend channel at around 1280 and a potential barrier at 1175 (that I probably imagined) failed badly, enabling a steep drop of about 50 points in yesterday's opening period.   A move that dramatic is almost certainly a third wave at some low level of trend.  Subsequent action has been within a new downward sloping trend channel.  Henceforth, 1150 might be a new resistance line (that I am imagining.)

In the bigger picture, this is a five wave impulse unfolding from the May 2 intraday high of 1370.58.   Wave 4 up ended with Wednesday's 1208 high, and wave 5 down is developing.  Wave 1 lasted a month and a half, so this will take several days, at least, and possibly a few weeks to unfold.

I still like my 1000 to 1050 estimate for the end of this phase of the decline, and an intermediate bottom, with lots more room on the downside to follow.

Meanwhile, gold has gone to an insane level.  The rise from 2000 (Y2K) to almost 2000 ($$$) has been exponential - aka a bubble.  This is a horribly mistaken substitute for a flight to safety.  Anyone who bought gold in the last three or four years will be wailing and gnashing their teeth, unless they sell some time soon to a greater fool.  The timing is unknowable, as is the ultimate high.  But bubbles always burst, and this one will not be an exception.  It might take years to play out, but the initial drop will probably be a terrifying panic.  You can expect gold to eventually end up back at the $250 to $400 level.

This will occur in the context of a strengthening dollar and collapsing Euro.  The risk of inflation at this point is essentially nil.  The real risk is deflation, and I am very, very afraid.

For an almost, but not quite, completely different assessment, refer to Dr. Doom.
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Thursday's Market

Yesterday I said:

It will take a convincing break of 1170-1175 to suggest we have finished with wave 4, and a plunge through the lower bound of Monday's up-sloping channel to confirm it.

We've had all of that, and more in the first half hour of trading today, with the SP500 hitting a low of 1134 and now quivering around 1140.  The DJI is down 4.2%, the SP500 down 4.7%, and the NDX100 down 4.9%.   Exciting action - and not in a good way.  More later in the day.

Update (after closing):  Another mostly sideways day - except for that uncomfortable 4.7% drop in the first 40 minutes.  Another way to describe the rest of the day is   "dead cat bounce ."  After being repelled by  1149-1150 four times between 11:50 and 12:23, the action for the rest of the day was contained in a slightly down-sloping trend channel.  Though the close was at 1140.65 - close to the mid-range of activity post 10:00 a.m., that is now the top of the channel, and the daily low of 1131, the bottom of the channel, occurred only 13 minutes before the close.  If my read of the sub-waves is right, there should be a drop of more than 20 points in tomorrow's early going (and perhaps a 5 to 20 point rebound intraday) before another drop to a new post-July low (under 1101.)  For now, I see no reason to amend my expectation of a temporary bottom around 1000-1050, challenging the lows of Summer, 2010.

Ugly, yes - but reality often is. 

Update 2:  EWI is giving away the next chart in emials and on their website, so I don't feel too bad about sharing it with anyone who might not have seen it.  The point is that once we break through the late naught support values - essentially the bottom of a decades long trading channel - and then whatever support the 2001-2 lows might offer, there is no support at any level of trend between here and oblivion.

Update 3: At Naked Capitalism, Yves Smith provides some equally gloomy international perspective.

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Quantitative Easing and the Stock Market(s)

In comments here, Art asked:

Hi, Jazz... I have the impression that when Quantitative Easing created pressures, the economy let off steam by sending asset values (and stock values) up. Did you ever look at correlations between QE and the Dow?

I admitted that I had not.  A little googling revealed that Bill McBride at Calculated Risk has done exactly that.  Here is his graph, and here is the source post.   The post also contains this Robert Shiller quote from July, 2010.

"For me a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent. I actually expect it." (via Reuters: Chance of Double-Dip US Recession is High: Shiller)

Which is a bit of an aside.  Be sure to have a look at the CR graph!

It seems to present a compelling case that QE 1 and 2 had significant effects on the U.S. stock market - very much to Art's point.  And it sort of makes sense, in a way.  Both QE's injected money into the economy . . . well -- not quite.  More correctly, both QE's injected money into the FINANCIAL SECTOR.  And wouldn't it make sense for some of that to end up in the Big Ponzi?  I mean, it didn't end up in job creation or the pockets of the middle class - let alone the working poor.

But, as I will show below, if you believe that the QE brothers cause movement in the U.S. stock markets, then you might as well believe they also cause movements in markets around the world.   I've labeled the points on the chart the same as CR did.  Blue line is SP500, Green line is DAX (Germany), Brown line is Nikkei 225.  The end of QE 1 squelched markets here and in Europe, and absolutely devastated it in Japan.

Update:  Art correctly reminds me that the end of QE 2 in July should be indicated on the chart.  Just put a mental mark at the right end of the graph, where all the indexes nose dive in unison.

Correlation is not causation.  In fact, the correlation is not really as compelling as I suggested up above.  QE 2 did comparatively little in this scenario.  The stock market moves to its own rhythms, and world wide markets are, in general, highly correlated.

Say what you will for or against QE.  It's effects on the Stock market are imaginary.

Wednesday's Market

This morning the SP500 shot up at the opening and peeked (peaked?) above the top resistance line I sketched on Monday - though not in a convincing way.  After bouncing off 1208 three times, it has since fallen steadily, and is now (1:15 pm) hovering around 1190, the middle of the three support/resistance lines posted Monday.  Action today and yesterday broadened Monday's narrow trading band in both directions. It will take a convincing break of 1170-1175 to suggest we have finished with wave 4, and a plunge through the lower bound of Monday's up-sloping channel to confirm it.  More after closing.

Update:  SP500 daily ranges.



At closing, the DJI and SP500 were each up less then a tenth of a percent.  The Nasdaq 100 was down more than half a percent: sideways results for a sideways day in a sideways week.   Yesterday, the index dipped below the crossing of the trend channel midline and the 1190 support line, then climbed the midline for the rest of the day.  This morning's peek above the 1204 resistance line was the high for the day.  Three days of crab-scuttling have brought the index from the top of the trend channel to nearly the bottom.  The bottom will cross the 1190 resistance line tomorrow.  Will it be a replay of yesterday's midline crossing?

Tuesday's Market

The DJI and SP500 both gapped down at the opening, slipped a bit further, then vacillated around the early low for the rest of the day.  More sideways action, but now with a negative twist.  Closes were off .67% for DJI and .97% for the SP500.  Trading range for the latter was neatly contained within the support/resistance lines I sketched yesterday.  In fact, today's range and yesterday's are nearly identical.  But yesterday's action was in the top half of the range,while today's mostly wrapped around the middle and slanted down.  Everything, including oil and precious metals, was down today.  The only exceptions were Treasury issues, which are moving counter to stocks.

As a no-extra-charge bonus, here is some international perspective from Louise Yamada.

Bottom line:  We're in a world of hurt.
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Counter-Current Rally

The DJI was up almost 2% today, and the SP500 was up almost 2.2%.  Both gapped up at the opening, and finished the day on a high note.  Pretty impressive, no?

No.

I was only planning on posting charts on Fridays, but Yahoo's basic chart function has a limited number of short windows: 1 day and 5 days.  So this is my last chance to get last Tuesday in before it's lost - and I thought this was pretty interesting.   By my reckoning, the current up move is a wave 4, and today's SP500 high of 1204.49 is right at the 50% retracement level of wave 3 down.

I've indicated an upward sloping trend channel from last Tuesday's low.  Movement has been sideways, then a jump up, rinse and repeat.  For now, the moves are enough to keep the trading range comfortably in the top half of the trading channel.  The first jump was about 30 points, the second was 10 to 15.  This is momentum being spent.  On the Yahoo interactive daily chart, 26,12,9 (I assume minutes) MACD flopped down by 11:00 a.m., and has since more or less flat-lined for the remainder of the day - despite the steady advance of the index.

I added some potential support-resistance lines to the chart, for intraday moves. The lowest of these is at about 1190, and the channel midline (orange) will cross it tomorrow.  That will be fun to watch. A significant bump beyond 1205 means the 50% retracement line didn't hold, with the next milestone at 62% (1229-1230.)  It could also mean I've got this all wrong.  But volume is thinning out, compared to last week (see bottom of the chart,) and that's consistent with waning momentum.

At any rate, this is wave 4, and wave 5 down is waiting in the wings.
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Quote of the Day - Warren Buffet on Taxation

Stop Coddling the Super-Rich

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends. 

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation. 

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

Iowa Straw Man Poll

From Toby Hardnen.

Tim Pawlenty, who has put more money and organisational planning into Iowa than any other candidate, attacked Bachmann and Romney at the Ames debate on Thursday night but today, his cowboy-booted foot resting on a hay bale, he sought to single out President Barack Obama. “Tell Barack Obama he has had his chance and it isn’t working,” he told the crowd.

Alas, for all that wasted time and effort, we won't have Timbo* to kick around anymore.  

Michele Bachmann, Iowa born and the favourite to win the Straw Poll, arrived half an hour late for her slot and then spoke for just over two minutes, saying that Iowans were “going to send the signal” to the rest of America just as they had in 2008.  “This is where Barack Obama got his start. This is where he’s going to come to his end, in Iowa.”

The winner: Michelle For-God's-Sake Bachmann, whose photogenicity and galvanizing intensity won the hearts and minds of Iowa's simple farmers - people of the land - you know . . .

The results.

1. Michele Bachmann – 4823 (28.6%)
2. Ron Paul – 4671 (27.7%)
3. Tim Pawlenty – 2293 (13.6%)
4. Rick Santorum – 1657 (9.8%)
5. Herman Cain – 1456 (8.6%)
6. Rick Perry – 718 (4.3%)
7. Mitt Romney – 567 (3.4%)
8. Newt Gingrich – 385 (2.3%)
9. Others – 162 (1.0%)

I guess we hear so much about "Tip of the Spear" Michelle rather than Ron Paul, over whom she eked out a stunning 0.9% margin of victory,  when both are clearly bat-shit crazy, because - unlike Mr. Paul, - Michelle has appeal to some independents, apolitical people and Democrats who are now ready to say, "Up yours . . ."




H/T to SoBe.
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*Update:  Oops.  That's supposed to be T-Paw.  My bad.

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The Week in Stock Activity

From today's perspective, yesterday's action was clearly all up, and contained in a well defined trend channel.  That trend continued {Update: briefly} into this morning, and now appears to be faltering, as it bounces along the bottom of the channel -  which is holding for the nonce.  The index has bounced off of 1189 twice today.  This was the top of the channel at the opening, but was close to the bottom at noon, the time of the second bounce.  I'll go out on a limb and say the channel breaks, and the next intra-day move is down.

I'll update with a chart for the week at the end of the trading day.

Update (after closing):

This report puts a positive spin on the day, and de-emphasizes the negative for the week.  

But the high for the week - reached today - is 30 points below last Friday's high, which was 80 points below the previous Friday's high.   The first few minutes of today's trading came within a fractional tick of defining the high for the day.   The low at 10:10 a.m. was the other extreme of the day's range.   All of this came very close to being contained by the last few minutes of Thursday's action.  Bottom line:  The Thursday thrust is spent. and we now have sideways action at some low level of trend.   This is all playing out within subwave 4 of 3 down.  My  bottom target for wave 3 is still 1000 to 1050.   FWIW, note big volumes at the end of each trading day, except today.  Chart from Yahoo Finance, lines and words by me.

Based on this week's movements, I've highlighted a couple of support/resistance bands that might be interesting to watch as the next few day's play out.    Context here.

Ten days ago I said, "The market has been trending sideways since mid-February of this year.  Sideways moves are hard to figure.  Is it a pause on the way to new highs or the beginning of a new downward phase?  My money is on the latter."  Now we can say something similar about this week's action, and within it, today's action.  There might be another upthrust before the main downward trend reasserts itself, but I see no reason for bullish optimism.

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What the Hell?!? Friday -- Sarah and Jewel

Stay tuned for Crawlter!

Betwixt The Music: Jewel & Sarah Palin from Jewel

H/T to Matt, an excellent tuba player.

Prechter's Perpsective

Watch the short video here, from CNBC's Closing Bell.
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Quote of the Day

Corporations are people, my friend... of course they are. Everything corporations earn ultimately goes to the people. Where do you think it goes? Whose pockets? Whose pockets? People's pockets. Human beings my friend.

--  Mitt Romney

It's pretty clear that Romney is not channeling the Supreme Court's loathsome Citizens United decision and stating that Goldman-Sachs is literally a person.  But he's still full of shit.  Whose pockets, indeed!  I hope he implodes, because Rick Perry is oh-so-much better.

For some reason, the Romney video resists embedding.  You can view it here.

Update: Aha - Dave Weigel posts it on YouTube, from a different camera angle.




As a trombonist, I have rather  different opinion.

 

H/T to the LW
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Thursday's Market Action

The SP500 gaped up at the opening today, fell back a little, then climbed to around 1156.  Currently it is up around 27 points from yesterday's close.  Nice recovery?  All of today's action so far has been contained within the range of yesterday's action.   In fact, it's all been contained within the last hour and 17 minutes of yesterday's action.  Note that yesterday's action was all contained within the last hour and 17 minutes of the previous day's action.  This is easy to see on the current five day chart at Yahoo.

Despite the big percentage changes, this is a market going nowhere, and it's been going nowhere since Monday's bottom at the  closing bell. Sideways action is counter-current, and the current is down. 

The sub-wave 4 top might be in, but that is no sure thing. A retracement all the way up to  about 1258 is possible, though I would be surprised by that kind of strength.  More to come.

Update: At 1:00 pm the index is bumping up against yesterday's post-opening high of 1160 and seems to have hit resistance - a band from about 1160 to 1170 going back to Monday morning.  Up or down from here to closing?  I'm not taking either side of that bet.

Closing Bell Update:  A strong finish allowed the index to punch through the resistance band (that I might have imagined) to a high of 1186.29, before slipping back to 1172.62 at the bell.  Bursting through the two day trading limits has taken us all the way to -- Tuesday.  What I said then was: "Let's say it tops early tomorrow  at 1180, a retracement of about 79 points.  Subwave 1 down was only 64 points.  If subwave 5 is 1.62*subwave 1, then it would cover 104 points, and wave three would bottom at 1078."   

Not much to add at this point - except that subwave 2 was a pretty direct A-B-C. between 7/18 and 7/22.  We can expect subwave 4 to be a more complex and possibly longer formation.

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Liveblogging the Crash

Another big down day for stocks?  That's how it looks if you draw a line chart, or only pay attention to closing values.  But today's SP500 move - a big gap down at the opening with a continued decline to about 1126 in less than a half hour, a choppy sideways move for the next 2+ hours, a rise to about 1160 at quarter past 2, ending with an impulse drop to 1120.76, the day's low - is all contained within the previous day's trading extremes.



In fact, it's all contained within the the last hour and 17 minutes of yesterday's trading, when the index jumped from its low to its high for the day.

From my red Update 2 comment here, I'm taking this to be components of sub-waves 4 and 5 of wave 3 down. It's possible, though, that we're seeing lower level waves unfolding within 3 of 3.

A problem with real time analysis is determining what level of trend you're observing.  That sometimes doesn't get sorted out until after the fact.  Either way, though, there will be lots of downside movement ahead - at every level of trend.

I've been in a mostly cash-like position for years, so I am not directly affected by the stock plunge.  Of course, a receding tide grounds all boats, and I'm still a member of this country's economy.  As fascinating as it is to watch this debacle, I can't claim that it's fun.

The Stupor Committee

This worked oh-so well.

Read it and Weep.

H/T to the LW

WASF!

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S&P Update

I'm taking today's low of 1101.54 to be the end of subwave 3 of 3.  The entire decline from the August 1 top of 1307.83 is 206.29 points.  Standard retracements would take subwave 4 to these values.



Today's close of 1172.53 is between the .33 and .38 retracement levels. 

Let's say it tops early tomorrow  at 1180, a retracement of about 79 points.  Subwave 1 down was only 64 points.  If subwave 5 is 1.62*subwave 1, then it would cover 104 points, and wave three would bottom at 1078.  With waves 4 and 5 ahead, an endpoint in the 1000 to 1050 range for this entire leg should be within easy reach.  This will take a few days to play out.

Update:  In comments, Susan asks if I factored in Europe.  I didn't.  But go to Yahoo Finance and check out the Dax, The Nikkei, the CAC.  This is not just a U.S. experience.  Stocks are crashing everywhere (and mostly had counter-current recoveries today.)  This only serves to reinforce my strongly negative stance.

Update 2 (10:10 a.m. Wed, 8/10):  Yesterday's close at 1172.53 was indeed the top of subwave 4.  Subwave 5 is in full force.  The SP500 gapped down to about 1144 at the opening and is now at about 1132, a drop of 3.4% for the day - in the first few minutes.  It's pretty interesting to watch this unfold from the sidelines.
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