The ‘EU Rally’ II

BarroMetrics Views:  The ‘EU Rally’ II

Yesterday I concluded that the recent ‘EU Summit Agreement’ was a surprise event and that the stock market would return to its underlying condition and structure. The key question then becomes what is the underlying condition.

Today, I’ll consider the macro view to that question and leave the micro to tomorrow.

For me, the underlying condition is a secular sideways market that but for the actions of world governments should have ended around 2015 – ended with less pain than we are currently experiencing. Their actions, however, are prolonging the extent of the correction and its eventual magnitude.

Let’s turn to a chart.

Figure 1 is the 12-month swing of the S&P.

I initially formed the view, that from 2000, we were seeing a repeat of the 1966 to 1982 secular sideways structure.

Traditionally, these st 11 to 15 years. If this view is correct, then this cycle is running late. And, as I said above, I believe, the reason for this is the futile efforts of world governments to avoid the correction caused by the misallocation of resources. All the efforts do is postpone the inevitable. That postpone would be fine but for the fact there magnitude of the correction increases exponentially the longer we have the postponement.

Anyway, returning to FIGURE 1.

I saw the May 1970 as equating with the March 2009 low. If the 1966 to 1982 roadmap was in play, then we ought to see a move above  1577 and below 1758 (Max extension of the boundaries between 1577 and 666).

Until May 2012, this view was my preferred view.

But the price action in May saw a confirmed 13-week change in trend pattern. This called for a 12-month line change below the 1074 low and raised the possibility of a 12-month line failure i.e. we would see a turn from 1423 to below 666 without seeing a move above 1578. In turn, the price action in June has cast doubts on the newest scenario i.e. cast doubts on the ‘failure scenario’.

So, we have two clear scenarios:

  1. Acceptance above 1423: suggests that the original hypothetical roadmap is correct: a move to above 1577 to 1758 and
  2. Acceptance below the June 1266 lowhe June 1266 low: suggests the intermediate high is in place and we’ll see a move below 666 without first seeing a move above 1577.

Tomorrow, I’ll look the lower timeframes to see if they can shed light on which scenario is more likely.

sp-12m.png

FIGURE 1 S&P 12-Month Swing 1966 to 2012

sp-12m-2.png

FIGURE 2 S&P 12-Month Swing 2000 to 2012

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