Despite what you think the market is telling you, we could be in store for a nasty bear market in the next three-to-five months, at least according to my analysis.
A picture is worth 1,000 words, so consider this short yet detailed post a juicy 2,000-plus word report on the current state of the stock market and economic cycle. The first image shows two cycles, the blue one is the stock market cycle and which sectors typically outperform during specific times within the cycle. Here you will see that during the late stages of a bull market the safe haven plays become the preferred choice for investors -- energy and precious metals.
Typically, the stock market tops before the economic (business) cycle does. Why? Because investors can see sales starting to slow and that earnings will start to weaken and share prices will fall, so the market participants start selling shares before the masses see and hear about a weakening economy. The stock market usually moves three-to-nine months before the economic cycle change is known by the masses.
Stock Market Topping According to Sector Analysis
Elliott Wave Count
Elliott wave theory is a tough strategy to follow. If you gave the same chart to five different people, you would likely have three or five very different wave counts.
Recently I have seen a flurry of Elliott Wave charts on the S&P 500 wave count which don't look correct. When I do Elliott Wave counts I like to use more than just price. I look into things deeper and use the market internals, volume flows, and overall market sentiment during those times. They must all be screaming extreme fear in the market in order for me to count it as a wave low. Fear is much easier to read and time than greed. So based on waves of fear and, I can plot the rest of the waves. By doing this, I feel it gives a truer reading of significant highs and lows we should use in our analysis.
So, here is my analysis of where we are in this market using Elliott Wave theory:
The current market is still very bearish and this could actually be the ultimate last opportunity to get short the market near the highs before we dive into a full blown bear market in the next three-to-five months.
The market is trying very hard to convince us it wants to go higher as it flirts with the recent highs for its second time in the past eight months. I know it is doing its job because so many traders and investors are changing their tune from bearish to very bullish.
I don't see it that way just yet, but it could happen as the market can do and will do whatever it wants. But all my analysis points to substantially lower prices over the next year.
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This article is commentary by an independent contributor.
Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter.
Chris is currently short the SP500 index.