S&P 500

[Samirofi]

ince late June, while the Emini S&P 500 (e-SPU) has rallied a remarkable 80% of the time, the 10-year U.S. Treasury Yield has done a fairly remarkable job of its own on the upside.

Since mid-June, yield has climbed from around 2.10% to 2.76%, and as we speak is circling 2.66%.

If the e-SPU is climbing because the economy is too weak for Bernanke & Company to take away super-easy money, then shouldn't longer-term rates be under pressure?

Apparently, bond investors have other concerns, such as the fact that the very liquidity that the Fed must continue to provide will become problematic at some point as inflationary expectations elevate.

Every pullback in yield has found powerful support at successively higher levels, while the equity indices continue to climb.

As yield exhibits a budding bull-market profile, the ProShares UltraShort 20+ Year Treasury ETF (TBT) -- which plays the corresponding decline in Treasury prices -- acts bullish as well.

Pullbacks in the TBT find support at successively higher levels within the 14-month rounded base pattern that projects to 80.00 next, and then 85.00.

Only a break below 74.96 will neutralize my near-term work and argue that a correction is in progress that when complete will offer up the next meaningful buying opportunity.

[PCMNewsdesk]

The stock rallied is extremely stretched and short-term rates of change have failed to confirm the previous four-day rally and are now turning down. The Dow, S&P and NASDAQ all closed slightly lower but all were up for the week. Volume levels were low again today, which is expected at this time of year. Sentiment measures are one-sided across the board. This is how it is supposed to "feel" at the end of a long rally.

This week's Investors Intelligence Advisor's Survey (InvestorsIntelligence.com) showed that the lopsided market opinion of advisors is now even more extreme. The chart shows the bull-bear plurality, which has shot up to 45.5. This marks the widest disparity between bulls and bears since 1987. Moreover, the bulls have outnumbered the bears for 114 consecutive weeks. Some readers question that because so many indicators are reaching multi-year and multi-decade extremes and the market is still rising, whether these indicators have lost their meaning. Our answer is an emphatic no! We received the exact same questions in 2007, as the market was rising and these same measures were hitting their upper registers. What it means is that the size of the top will be commensurate. In other words, the coming decline will be larger than the 2007-2009 bear market, which cut the blue-chip stock averages but more than 50%.

Some pundits have argued that the stock market cannot possibly top because the public is too "worried" and not bullish enough on the stock market. This chart shows the weekly American Association of Individual Investor's Survey, which measures the sentiment of the retail investor. The bull-bear plurality jumped to 36.5 yesterday, which is the second highest extreme nearly 7 years. It's a greater plurality than that which accompanied the October 2007 top.

The above chart plots the S&P 500 with the CBOE Skew Index at the bottom of the graph. In essence, this index measures the increased likelihood of a jump in volatility based on out-of-the-money S&P 500 options. The higher the Skew Index, the steeper the slope of implied volatilities. This is how the CBOE website describes the Skew Index:
"Investors now realize that S&P 500 tail risk - the risk of outlier returns two or more standard deviations below the mean - is significantly greater than under a lognormal distribution. The CBOE SKEW Index is an index derived from the price of S&P 500 tail risk. Similar to VIX, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant." (www.cboe.com) At last Friday's close (Dec. 20), the Skew Index rose to 143.20, which is the second most extreme reading in its 23-year history (data begins in January 1990). The only higher data point was in October 1998. We can now add yet another sentiment measure to our growing list that is at a multi-decade extreme.

One indicator at an extreme might be able to be explained away. But there is no cohort of investment group that is not heavily weighted toward an optimistic extreme. It's an ideal alignment for the end of a long rally.

Seasonal stock trends are positive into the New Year but the wave structure is very mature. There may be another down-up sequence into a high, but we are not certain of this move. Our best assessment is that this morning's 16,529.00 high in the DJIA is the end of wave (iii) of v (circle), which implies wave (iv) down to about 15,809-16,254 (1805-1820 in the S&P) and then one more push up to complete wave (v) of v (circle) of 5. A close under 16,000 in the Dow, 1797 in the S&P and 1786 in the E-mini would start to shift the odds to a more immediate bearish potential.

On Monday we discussed how stretched the NASDAQ Composite rally had become. The index closed back within 2½ standard deviations on Tuesday and again yesterday, and then closed down today. Here, too, there may be another down-up sequence to complete the sub-waves of the rally. But a close below 4050 would begin to shift the odds toward an even larger and longer selloff.

[Raam]

Wall St. Ends Best Year Since 1990s

Wall Street ended 2013 on a record high Tuesday, with both the S&P 500 and the Dow Jones Industrial Average posting annual jumps not seen since the 1990s.


Stocks closed out the year with major indexes advancing throughout 2013 as a result of the Federal Reserve's massive stimulus and expectations for accelerating growth going forward.


The S&P 500 closed at 1,848.35, up .4 percent and 29.6 percent on the year, the largest annual increase since 1997. The Dow Jones Industrial Average also closed at a record high, reaching 16,576.73, up .4 percent from a day earlier and 26.5 percent on the year, marking the largest annual jump since 1996. The NASDAQ closed at its highest level in 13 years, rising 38.3 percent on the year.


Both the Dow and the S&P 500 finished the final trading day of 2013 at record closing highs, with the Dow Jones closing at a record high 52 times this year.


All 10 S&P 500 sector indexes ended the year with gains as investors rode the Fed's extraordinary stimulus in a year that had only the slightest of hiccups. Wall Street even weathered a partial shutdown of the U.S. government, as well as the recent announcement that the Fed would trim its monthly bond purchases in response to an improving economic picture.


About 63 percent of stocks traded on the New York Stock Exchange closed higher for the day, while 55 percent of the shares traded on the NASDAQ ended in positive territory.


The Dow Jones industrial average gained 72.37 points, or 0.44 percent, to end at 16,576.66. The Standard & Poor's 500 Index advanced 7.29 points, or 0.40 percent, to finish at 1,848.36. The Nasdaq Composite Index rose 22.39 points, or 0.54 percent, to close at 4,176.59.


The Dow also touched an all-time intraday high of 16,588.25 on Tuesday, while the S&P 500 set a record intraday peak of 1,849.44.


The S&P/Case-Shiller composite index of home prices in 20 metropolitan areas gained 0.2 percent in October from September, but posted the strongest annualized gain in October in more than seven years.


Few investors expect 2014 to deliver the same scale of returns. According to the most recent Reuters equity poll, the S&P 500 is seen rising to 1,925 by the end of 2014, which represents an upside of 4.1 percent from current levels.

[PCMNewsdesk]

[Bottom Line]: The stock market remains at or very close to the end of its rally. After 2014's inaugural down day, the Dow and S&P recovered and closed higher on the day. The NASDAQ lagged and was lower today too. We cannot stress enough the importance of sentiment, particularly at this juncture in the wave structure. It is lopsidedly optimistic, which, paradoxically, means that the uptrend is fast approaching an end.

Today's new issue of The Elliott Wave Financial Forecast discusses the extreme sentiment picture that currently attends the market's advance. The wave structure is relatively straightforward. The five-wave advance from most recent low at 1754.00 in the E-mini (Dec. 16), 1767.99 in the S&P 500 (Dec. 18) and 15,703.70 in the DJIA (Dec. 12) is Minute wave v (circle). The impulse pattern either ended on the last bar of the last day of trading in 2013 or will do so with one more push for the final wave of advance. The E-mini chart shows the wave labels, with the high occurring at Tuesday's close. The Alt. line shows the possibility of one more high to complete wave (v) of v (circle). Both interpretations are acceptable but the level of optimism toward the market suggests strongly that if a new high is seen, it will be short-lived. If Tuesday's high remains intact, the December 31 topping date would be a 24-year cousin to Japan's Nikkei peak, which occurred on December 31, 1989.

This weekly S&P chart shows the rally relative to the channels that the market formed over the nearly four-year rally. When Cycle wave b completed its initial zigzag in May 2011, labeled wave W (circle) on the chart, the index's rally ended at the mid-line of the (A)-(B)-(C) channel. Prices are now at the top line of the second (A)-(B)-(C) channel, suggesting not only completion of the second zigzag, labeled wave Y (circle), but termination of the entire Cycle-degree advance. At the same time that the S&P is bumping its channel line, the DJIA is at the top line of a similar channel. The market creates these lines. All we do is connect the end points to highlight what the stock market thinks is important. The bottom graph on the Dow chart plots the rally's 10-week rate of change. EWFF said that momentum was weakening and the ROC shows one way to measure the relative weaker rally from early October versus prior advancing waves.

Short term, the market still has options but a close under 16,000 in the Dow, 1797 in the S&P and 1786 in the E-mini would jump the odds to a large downside potential already underway.

[PCMNewsdesk]

[Bottom Line]: It's been a cold few days in the market as well as the air temperature. The year has started with three consecutive down closes in the S&P and NASDAQ. The near-term wave structure still indicates that the market is at or very near the end of its rally.

The market's wave structure and the resulting near term potentials remain the same as in our Friday commentary. The five-wave advance from most recent low at 1754.00 in the E-mini (Dec. 16), 1767.99 in the S&P 500 (Dec. 18) and 15,703.70 in the DJIA (Dec. 12) is Minute wave v (circle). The pattern is best seen on the E-mini S&P chart above. It is possible to label the advance as complete. From the 1846.50 high on December 31, the E-mini traced out a small "five down" to 1820.50 on January 2. Today's low at 1817.25 was not as weak internally, so it is probably wave b of (ii), which is tracing out an upward flat (see text, p.45). Wave c of (ii) should carry to 1833.00 or modestly higher to complete the upward correction. The U.S. Senate's confirmation of Janet Yellen as Fed chief could be the perfect "reason" for the market to complete its upward correction. Regardless, wave (iii) down will be a strong decline that draws the E-mini toward the wave iv (circle) low at 1754.00. Another possibility is shown by the Alt. line on the chart. Today's low could be wave (iv), which would lead to wave (v) up to above 1846.50 to complete wave v (circle). A break of today's low (1817.25) would greatly weaken the Alternate possibility.

[PCMNewsdesk]

Here’s the finish of the E-mini’s rise from 1754.00 on Dec. 16 and a longer term look at the S&P 500. From the 1846.50 high on December 31, the E-mini traced out a small "five down" to 1820.50 on January 2. The target for wave c of (ii) was 1833 or modestly higher, so today’s high of 1834.75, probably marks the end of the correction. In any case, 1846.50 should hold and be followed by a rush lower in wave (iii), which should approach the wave iv (circle) low at 1754. On the other hand, if Monday’s low is the end of wave (iv), the December 31 high should be surpassed, as shown by the Alt. line on the first chart. A move down through the wave b low at 1817.25 will take this possibility off the table and confirm the potential for much lower levels.

[PCMNewsdesk]

The NYSE advance/decline ratio remains relatively subdued; today's 1.88:1 ratio was only slightly more robust than last Friday's a/d of 1.36:1 (Nov. 8). For comparison, the strongest a/d in wave b (circle) of 4 was 5.96:1 on September 18. The strongest a/d in wave 5, so far, is 5.30:1 on October 10, the day after the wave 4 low. So while the rally has carried higher, there have been fewer stocks advancing versus declining on a daily basis. This measure does not portray a strong advance but neither does it mean that the rally must stop right now. As the hourly S&P chart shows, the wave structure, which is paramount, appears to need further subdivisions before the advance may be counted complete. It is likely that the S&P is nearing the end of a small third wave after which a fourth-wave pullback will develop and then a final fifth wave rally to a new high. Once the fourth wave develops, a fifth wave target will be able to be established. It may not be significantly higher however, because as shown on the weekly chart, the S&P is bumping up along the top channel line formed by the entire Cycle wave b rally from March 2009.

A decline below 1750.00 (15,600 in the DJIA) would negate the remaining near term bullish potential.

[PCMNewsdesk]

These charts help to show the subdivisions of the push to a top. The first chart is the E-mini S&P from the Minor wave 4 low at 1540.75 on June 24, 2013. It's a 720-minute chart simply to scrunch in as much data as possible and still show the sub-waves. The 120-minute chart zooms into the move since 1754.00, the wave (iv) low on December 16. The decline from the December 31 high at 1846.50 to Monday's low at 1809.50 was an "a-b-c," which stopped going down at the support we discussed Monday night. As we said above, the E-mini has yet to make a new high so technically, the peak is still on December 31. We've labeled that high as wave iii (circle) to keep the structure aligned with the cash index, which did make a new high. If the market turns down from current levels, we will consider the top to have occurred in December, along with the DJIA.

For tomorrow, it's possible that the Dow concluded a small fourth-wave at today's close, which would mean an up open tomorrow to complete a small fifth wave. Prices should then reverse lower. A break under Monday's lows would be a strong indication that the current fractured behavior is coinciding with the end of the rally. These lows are 16,240.60 in the Dow, 1815.70 in the S&P, 1809.75 in the E-mini and 4098 in the NASDAQ Composite. The Dow would be in a third-wave decline, which should be strong and long. If the Dow's fifth wave carries the index above the December 31 high at 16,588.20, the entire rally should conclude over the next week or so.

[PCMNewsdesk]

[PCMNewsdesk]

[Bottom Line]: Yes Virginia, there are bear markets. Commodities have been in one since 2008, gold and silver have been in one since 2011 and U.S. Treasury bond prices started one in 2012. We've discussed the final holdout in this long topping parade, stocks, and this week's violent decline should align the stock market with these other markets. Even the high-flying NASDAQ had a "key reversal" week, with a new recovery high and a down close. We'll point out key junctures as the decline unfolds to help keep you aligned with the trend.

Today's market action is meaningful and tonight's charts speak for themselves. You know how hard the stock market has fallen over the past two sessions, with even the NASDAQ and the Dow Transportation Average, the leaders of the former rally, joining the across-the-board decline. The Transports are particularly noteworthy, as discussed in this morning's EWT Interim Report. The Interim was extremely timely as the Transportation Average declined 4.11% today, it's single largest percentage decline in 3½ years. I haven't had an opportunity to go through our entire data base but today's percentage selloff appears to be a record or near-record for the Transports the day after the index made a new all-time intraday and closing high. It indicates a significant trend change.

Tonight's daily charts show the DJIA and S&P turning lower after meeting again the top lines of their respective channels. Today's decline draws each index below the wave two-four trendlines, which started in October. In addition, the decline was potent enough to draw the DJIA back beneath its 14-year-long resistance line that connects the January 2000 top and the October 2007 peak (using daily extremes). Thus, the connection between the three greatest extremes of the long topping process remains intact. Today's selling pressure was strong; there were 6½ stocks down for every 1 up on the NYSE. The a/d ratio of .155:1 marks the strongest downside breadth in 7 months (June 2013). Big Board down volume was 93.3% of total volume, making today the first 90% downside day since at least last August. The put/call ratios, which we highlighted in Wednesday's STU, have turned decidedly higher, confirming the message of the wave structure. The high-degree of optimism that propelled the rally to new all-time highs suggests strongly that the intensity of today's selling pressure is the "kick-off" to a major bear-market wave. The next bounce, when it starts, will likely be very sharp, but ultimately it will prove to be counter to the market's main trend, which is now down.

The U.S. Fed will meet next week and announce their latest "taper, non-taper" decision on Wednesday, January 29. It will be the first meeting led by new Fed chair Janet Yellen, so there is likely to be extra media coverage of the affair. Emotions should run high, particularly now that the broad stock indexes have topped.

Finally, we'd like to give a shout out to Carter Worth at Oppenheimer, who recently echoed our analysis in the January 3 EWFF on the significance of the return in popularity of Wall Street-themed movies (see EWFF, p.10 for the analysis and movie posters). Stock market technicians understand indicators that signal psychological extremes, especially when they register in the culture at large. Of course, a broader insight into social mood is even more valuable because it allows one to monitor pop culture for clues in understanding trends and their potential for reversals. This is why we have a dedicated section in EWFF to discussing these developments, called Cultural Trends. Readers consistently tell us that it's one of their favorite parts of the letter. Make sure to check it out!