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Is the Bear Market's Most Violent Decline Right Around the Corner?

Is the most powerful of all waves right around the corner?

The short answer is "YES."

The long answer will help you anticipate where and when …

First, let's describe wave 3.

If wave 3 was a superhero, he'd probably be The Flash (though he could be The Hulk).

Like The Flash, there's no mistaking wave 3's characteristics:

It gets to where it's going in a hurry.
It usually catches everyone by surprise, and
You'll know it when you see it.

Robert Prechter describes third waves in his seminal book with A.J. Frost, The Elliott Wave Principle:

"Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. … Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series."

But to truly appreciate the power and lightening-speed of third waves – and be prepared to anticipate one – you must first know how to identify the waves that precede it, namely wave 2.

Here's what Prechter writes about wave 2 in The Elliott Wave Principle (two words have been reversed to apply to bear markets):

"At this point, investors are thoroughly convinced that the (bull) market is back to stay. Second waves often end on very low volume and volatility, indicating a drying up of (buying) pressure."

If you're thinking the description of wave 2 seems eerily similar to today's environment, you're right.

On February 23, Robert Prechter's Elliott Wave Theorist recommended aggressive speculators close their short positions to avoid being caught in a "sharp and scary" rally. Just a few trading days later, the market began a multi-month rebound – wave 2.

BUT … Volume has steadily decreased since that rally began in early March. Volatility is on the rise. And perhaps most noteworthy of all: The investment herd – more specifically, the financial media – has jumped to proclaim the "worst is over."

All the classic characteristics of bear-market rallies are there. Even a quick online search turns up headlines like:

"Worst of the recession is over" ~ July 7

"Econ Crisis Not Over, But Worst Has Passed" ~ July 8

"June job bounce could mean worst is over" ~ July 7

"Wall St's fear gauge suggests the worst is over" ~ June 28

Recognizing the personality of wave 2 allows you to prepare for what's next, a move you really want to look out for, wave 3 – The Flash.

Third waves move far and fast. They make good opportunities for aggressive speculators, but they can become a death knell for longer-term investors' portfolios.

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Posted by Mr Thx Monday, July 13, 2009 0 comments

Get Out of Higher-Risk Stocks Now!

The stock market’s rally has been impressive. The major indexes are now up about 40 percent from their recent lows, give or take a few percentage points. And for anyone who scooped up more speculative shares on weakness, the profits could be even higher.

Personally, I don’t ever recommend purchasing shares of companies with shoddy business models, consistently unprofitable operations, poor track records of caring about their shareholders, etc.

But I realize that many investors did buy these kinds of stocks as aggressive ways to play a rebounding market. And that’s why I wanted to make a particular point in today’s column to warn you about holding on to these companies in your portfolio.

Reason: I believe the easy gains have already been made, and the losses on any downside move could be very sharp and swift, erasing any profits that have piled up.

In Fact, the Very Definition of “High-Beta” Stocks
Is That They Make Outsized Moves BOTH Ways!

Typically speaking, the less stable a company is fundamentally, the greater the swings in its share price. That makes sense when you think about it …

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Posted by Mr Thx Friday, July 10, 2009 0 comments

Unemployment, Not the Stock Market, Distinguishes a Recession From a Depression

What are the most important and enduring characteristics of the Great Depression? And what should we monitor to determine how severe today’s situation really is?

The stock market will give important clues. But the economy, especially unemployment, defines depressions.

That should be obvious. However, after the stock market rallied off its March 2009 low, the media and many pundits seem to be fixated on the financial markets to determine the severity of the crisis and to call its end.

To see if the bulls’ hopeful thinking holds water, let’s go back to 1929 and have a look at the stock market’s behavior during those horrific times …

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Posted by Mr Thx 0 comments

The Weekly Report For July 6th - July 10th, 2009

July 5, 2009- Market Summary
In this week's report we'll take a look at a common reversal pattern, known as a head and shoulders, which is starting to form on the charts of several major indexes. For those who need a quick refresher, you'll find that this pattern must go through four main steps to signal a reversal.

The first step is the formation of the left shoulder, which occurs when the security reaches a new high and retraces to a new low.
The second step is the formation of the head, which occurs when the security reaches a higher high, then retraces back near the low formed in the left shoulder.
The third step is the formation of the right shoulder, which occurs with a high that is lower than the high formed by the head, but is again followed by a retracement to the low of the left shoulder.

The pattern is complete once the price falls below the neckline, which is a support line formed at the level of the lows reached at each of the three retracements.