BarroMetrics Views :

An attendee to my webinar sent me Jermey Bentham’s lastest report (GMO). It’s free to those that register at the site. My response to James turned into a Ben Hur; a response I felt was worth posting. So here it is:

Hi James

Thanks for the pdf’s heads up.

Jeremy came at the conclusion via a different route but he essentially has followed the 1966 to 1982 scenario. In 1974 (2007) we made new lows and then spent the next 8 years chopping around.

As to when the recession/deflation may end:

My best is 2015. Secular bear markets are around 15 years - the S&P topped in 2000; Dow Theory says a correction will be around 33.33% of the impulse move. That ran from 1982 to 2007, 25 years. This projects a target to 2015 (2017 + 8).

That is my technical take and the one I rely on in my trading. But I keep a wary eye out for my fundamental scenario: that the pump priming will lead to massive inflation; that the FED initially react to this inflation with muted response and  then react too much too late; that the FED response will lead to deflation.

But even if this scenario is proven correct, who knows when it will happen? Nothing stops the market from reaching the Primary Sell Zone or Death Zone before the events take place.

The key is to watch the indicators. That’s why I keep an eye on the ECRI (http://www.businesscycle.com/resources/) and John Williams’ Shadow Stats (http://www.shadowstats.com). ECRI indicators have a great record for forecasting the business cycle and I have much respect for John’s work. They are on opposite sides of the camp at the moment. ECRI leading indicators are signalling the end of the recession; ShadowStats take the same view I do on the inflation/defllation scenario.

I reconcile the conflict by viewing the ECRI indicators as belonging to a shorter timeframe.

My trading benchmarks have not changed.

The US stock market is signalling that a correction is in the wind . The ‘average price per bar’ momentum (range/time) for this rally is historically one of the largest we have seen. On the data supplied byGann Global (http://www.gannglobal.com/), the retracement following momentum of this nature has had a range of 55% to 90%, with a mean of 75% and a stdev of 15%. This means that the retracement can be at least 60%. This assumes that the move up is of a 12-M magnitude. What if it isn’t? What if this was only a 13-w rally retest of the breakout?

The next down move will also tell us. By comparing the down move with the previous down and up legs, we’ll have an indication of whether we’ll see a resumption of the downtrend. Right now I am leaning to the 1966 to 1982 scenario.

If it is an 18-d correction, we can project a price and time target for the end of the correction once the correction is in play.

Refer this blog post to a friend or colleague…