Weekend Strategy Review January 30, 2016

Posted by OMS  at January 30th, 2016

The Dow rose 397 points on Friday, closing at 16,466.   It was up 959 points for the week.  The NASDAQ was up 107 points on Friday and up 22 points for the week. 

Last week I talked about how the Dow appeared to be completing a corrective wave 4 sequence.  After the Dow completed its wave 3 bottom, corrective wave 4 rallied back to the 16,137 level in 2 1/2 days. The rally happened a lot sooner than I expected and caused me to be concerned about the timing.

Here’s what I said last week:

“So as of now, I have to assume that the rally that has occurred during the past few days is minor wave 4 up within Major Wave 1 down and not the start of a new major bullish move.

Also, the Dean’s List is still very negative and The Tide is neutral. So until these major market timing indicators turn positive, I have to assume that the current rally is a wave 4.

What I don’t know at this point is whether Friday’s rally was the end of minor wave 4 up or just the end of the first wave of minor wave 4 up.  Friday’s intraday trading action formed five distinct waves on the 10 minute bars, so one could argue that it has all the necessary ingredients for a near perfect 3-3-5 zig-zag pattern.  I had been expecting this type of complex pattern to form and now it has.

But the timing is wrong.  I had also been expecting the wave 4 retracement to last about 10 days to 2 weeks.  So far it’s lasted 2 ½ days.”

So as things turned out, last Friday’s move was just wave ‘a’ of minor wave 4 and during the week, we saw the formation of wave ‘b’ down and then yesterday’s Big rally for wave ‘c’.

At this point, I can’t tell if minor wave 4 up completed on Friday, because the Dow closed on its highs. But at 16,466, it should be close.

One thing to note is that The Dean’s List is still negative. And as long as it remains negative, I have to assume that Friday’s rally was wave ‘c’ of minor wave 4 up and not the start of a new major Bullish move up. And now that the entire rally since the wave 3 bottom has taken 8 trading days, it satisfies my original concern about timing.

So what to do? Hmmm?

Before I go there, I want you to do some thinking about why the market rallied on Friday. For the time being, I want you to forget about the fact that wave 4 needed one more rally leg (wave ‘c’ up) to complete. What I want you to focus on is the  reason the commentators on CNBC were saying the market rallied.  It was because the Bank of Japan was adopting a negative interest rate policy. The Bank plans to cut deposit rates that they pay to commercial banks from 0.1% to negative 0.1%.  Hmmm?  The ECB has used negative interest rates as part of an array of stimulus efforts for the past few years, but the euro zone still continues to struggle with deflation.   So now the BOJ says it wants to soak up reserves in their system to encourage borrowing and drive up inflation. Drive up inflation? Are they nuts?

Folks, let me tell you something. The folly of our Fed is only exceeded by the guys in Japan’s Central Bank. These guys just can’t figure it out. It’s been over 25 years since Japanese have had a growing economy and a healthy stock market. And with policies like this, it might take another 25 years.

Back in 1990, the NIKKEI was trading just under 40,000. It fell to a low under 7,000 in 2003 and is currently trading at 17,500. So after 25 years, Japanese stocks are still less than half he price they were before the crash. Amazing. This is what happens when Central Bankers try to fix things. If they would have let the market recover normally, Japan would likely have been much better off today. They probably would not be back to where they were before the crash, because the demographics of an aging population are not there to support a lot of growth. But the economy would likely be a lot better than it is now.

Anyhow, I didn’t see Japan’s interest rate reduction as a good thing. To me, using negative rates to drive up inflation is probably the last thing a Central Bank should do. It’s a sign of total desperation!

It means that everything else they tried for 25 years has failed. It’s the boxing equivalent of throwing in the towel. Once these policies take hold, the Japanese are going to have massive inflation that will also have to be ‘managed’ with EXTREMELY high interest rates. So the problem will go on and on. This is what happens when Central Bankers start to ‘manage’ an economy. This is why I’m so concerned about what our Fed ids doing.

Back in December, we saw how the Fed decided to increase interest rates at a time when the rest of the world was lowering. It caused the Dow to drop over 2,000 Dow points.

The Fed cited an improving economy as the reason for increasing rates. But on Friday, the BLS reported that the economy actually slowed sharply in the final three months of 2015 to a 0.7 percent annual rate as consumers slowed spending, businesses cut back on investment and a high dollar trimmed exports.

Friday’s growth rate was less than half the modest 2 percent annual rate of the previous quarter. It was the weakest growth rate since the first quarter of last year when severe winter slowed growth to a 0.6 per cent annual rate. So you have to wonder what numbers the Fed was looking at?  Is the data that bad or is the Fed that incompetent? Hmmm? Increasing interest rates when the economy is slowing invites a recession, possibly a depression. And with GDP now at a 0.7 percent growth rate, it won’t take much to push it under zero. If the situation in the oil patch doesn’t improve and energy prices continue to decline, this could easily trigger a number below zero.

Anyhow, the thing I want you to take away from the above discussion is that I didn’t see Friday’s ‘reason for the rally’ as a good thing. The news, both in Japan and in the U.S, was actually very bad.

So instead of getting all excited about the possibility a new rally starting, take some time to look at the chart I posted early Friday.  I believe the rally was the final wave of a complex wave 4 retracement.  I see the rally as an opportunity to establish positions in inverse index ETFs from the Dean’s List. I believe that once minor wave 4 completes, the Dow is going a lot lower.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

02-01-2016

FAQ

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.