Chartered Fortrend Securities - Wealth ManagementJoel Hewish is an Investment/Financial Adviser at Fortrend Securities and manages the Wealth Management division. The opinions expressed are his own and do not represent those of Joe Forster orthe International Advisory division. Edition No. 19 10th November 2010 Bottom Line: The rise of the S&P 500 above the April 2010 high has now opened up several possible wave counts. While in the short term this provides a level of uncertainty as to how long the market will continue to rise before topping, the longer term cautious and bearish view still remains well in place. While the rallyfrom March 2009 has carried further than first anticipated, it still remains comfortably within the bounds ofthe bear market rally thesis. The internal strength of global equity markets continues to wane and fails to confirm the sustainability of recent global equity market increases, while the structural macroeconomic issues in the western world continue to provide enormous challenges over the next two years. Investors should continue to use the recent rises as an opportunity to reduce risk and position their portfolios to profit from this opportun ity!!Chart 1 – US S&P 500 •The rise of the S&P 500 above the April 2010 high has now meant that the previous wave count, signifying the beginning of the next leg down, has now been invalidated and a new interpretation of the waves is now necessary. •While Primary Wave 2, which commenced in March 2009, continues in its advance, the rise above the April 2010 high has NOT invalidated my secular bear market view. Given the rise above the April 2010 high, it is my view that the rise since March 2009 to date is a Primary Degree Wave 2
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8/8/2019 Edition 19 - Chartered 10th November 2010
Joel Hewish is an Investment/Financial Adviser at Fortrend Securities and manages the Wealth
Management division. The opinions expressed are his own and do not represent those of Joe Forster or
the International Advisory division.
Edition No. 19
10th November 2010
Bottom Line: The rise of the S&P 500 above the April 2010 high has now opened up several possible wave
counts. While in the short term this provides a level of uncertainty as to how long the market will continue
to rise before topping, the longer term cautious and bearish view still remains well in place. While the rally from March 2009 has carried further than first anticipated, it still remains comfortably within the bounds of
the bear market rally thesis. The internal strength of global equity markets continues to wane and fails to
confirm the sustainability of recent global equity market increases, while the structural macroeconomic
issues in the western world continue to provide enormous challenges over the next two years. Investors
should continue to use the recent rises as an opportunity to reduce risk and position their portfolios to
profit from this opportunity!!
Chart 1 – US S&P 500
• The rise of the S&P 500 above the April 2010 high has now meant that the previous wave count,
signifying the beginning of the next leg down, has now been invalidated and a new interpretation
of the waves is now necessary.
• While Primary Wave 2, which commenced in March 2009, continues in its advance, the rise above
the April 2010 high has NOT invalidated my secular bear market view. Given the rise above the
April 2010 high, it is my view that the rise since March 2009 to date is a Primary Degree Wave 2
8/8/2019 Edition 19 - Chartered 10th November 2010
subsequent advance is very difficult to predict, as too is the length of time for the expected final
waves, if indeed they occur.
• It should be remembered that Elliott Wave analysis is a market mapping tool with some predictive
capabilities. Where it is most effective is when the wave count is combined with the weight of
other technical evidence and macroeconomic data to help conceptualise where the market is likely
positioned with regards to its short, medium and longer term trends.
• Just a note on the above chart, some may question where the black coloured labels are placed and
whether or not there is actually a wave that can be depicted. As these labels depict waves of a verysmall degree, the waves are only visible on smaller time frames such as the 4 hour and 2 hour
charts, which are not shown here, but the waves are there.
Chart 3 – S&P 500 Alternative Wave Count
• One possible alternative wave count that could be utilised is a variation on the wave counts as presented
above. The variations of the wave count above have been put forward by other Elliott Wave technicians,whom I respect highly, and the arguments for the above interpretation are convincing.
• In short, they argue that the decline in the bear market actually completed in November 2008 and the
subsequent waves following that market bottom actually form part of a larger double zigzag correction.
• If this interpretation is correct, the market top is just around the corner and it would coincide with a
number of technical (Sentiment and Divergence) and market relationships (Currencies and Commodities)
that appear to support this interpretation of the wave count.
• Time will tell but prudence and risk management should still remain your number one priority in the current
market environment.
• It could also be possible that a double top could have recently been put in place. In this instance we would
look for a break below the 2010 low and for a fall to extend at least 200 points below the July low beforefinding support.
• It should be mentioned that almost no one in the financial media is expecting a decline in the markets at
present and it is exactly this environment which preceded market tops in October and November 2007 in
the US and Australian markets.
8/8/2019 Edition 19 - Chartered 10th November 2010
Analysing Secular Bull Markets and Secular Bear markets
Chart 9 – S&P 500 Composite Inflation-Adjusted Regression to Trend
(Source: dshort.com, seekingalpha.com)
• Thanks to the work of Doug Short from seekingalpha.com, the above chart shows the inflation
adjusted performance of the S&P 500 displayed on a logarithmic scaled chart since 1870.
• The following hyperlink http://seekingalpha.com/article/202431-monthly-update-secular-bull-and-
bear-markets, connects you to the article which this chart was pulled from and makes for an
interesting read. The chart is useful in determining whether or not stocks make for a good medium
to long term investment given the current environment and whether or not March 2009 was infact the actual market low in the secular bear market. While the article was written in May 2010,
the remarks are still relevant.
• In short the article makes the following points:
The annualised rate of growth since 1871 is 1.96%, inflation adjusted.
Factoring in the dividend yield you get an annualised return of 6.64%.
The nominal annualised return (not adjusted for inflation) is 8.85%.
Average inflation adjusted returns during secular bull markets averages 415%.
Average inflation adjusted returns during a secular bear market averages -65%.
Adding a regression line to the data series the slope of the regression line equals1.70% annualised.
• Based on this analysis, previous secular bear markets have bottomed at levels of -34%, -59%, -66%,
-58% and -54% below the regression line for an average distance of -54.2% below the regression
line.
• The most recent low in March 2009 finished at just -8% below the regression line, well and truly
short of the shallowest bottom and the average bottom since 1870.
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Chart 10 - S&P 500 Long Term Price to Earnings Ratio (CAPM)
(Source: RJ Shiller, Matthew Claassen, seekingalpha.com)
• But the evidence doesn’t stop there. Chart 10 above dates back to the 1880’s and shows thetrailing earnings Price to Earnings ratio of the S&P 500 since that period. At each major secular
bear market low during that period, before the market commenced a new secular bull market, the
trailing Price to Earnings ratio for the S&P 500 has always receded below 10x and has twice
approached P/Es closer to 5x. • At the low of March 2009, the Price to Earnings ratio fell to around 13x not even close to breaking
below 10x let alone the near 5x Price to Earnings ratio that has occurred at two of the previous
secular bear market lows.
• With the current trailing P/E around 20x, this valuation appears well in excess of previous P/E highs
in past bear market rallies and appears to be approaching levels more consistent with secular bull
market peaks. While the above two charts provide a convincing argument that the lows in this secular bear market have
not yet been seen, when you combine the evidence of those two charts with other important
characteristics associated with bear market lows, you need to take notice. And what are the other markers
that come to mind? Well at each major secular bear market low, the S&P 500 trailing dividend yield has
been in excess of 6% dating back to 1880. It was just 3.2% at the March 2009 low and it is now closer to
1.85%. Furthermore, S&P 500 mutual fund cash levels have always peaked at approximately 10% or higher.
S&P 500 mutual fund cash levels peaked at just 6% at the March 2009 low and are now close to an all time
low at 3.5% (3.4% is the all time low). And finally the wave structure and internal strength of the S&P 500’s
rise since March 2009 is not consistent with the onset of a new secular bull market.
As such I strongly encourage you to contact us to discuss your portfolio, how it is positioned, how you
can manage the risks and prosper during these uncertain economic times.
I hope you have enjoyed this edition of Chartered and found the content of interest. If you would like meto analyse a particular market or chart from a technical point of view, please email your requests to
[email protected] and I will endeavour to look at any requests in upcoming editions.
8/8/2019 Edition 19 - Chartered 10th November 2010
Chartered is a fortnightly publication from Fortrend Securities – Wealth Management and is provided for the purpose of general information only. The views and opinions expressed in the publication are those of Joel
Hewish and do not necessarily match those views of Joe Forster and Fortrend Securities – International Advisory. This publication is provided as general information only and does not take into account your
personal circumstances, aims and objectives and should not be considered personal advice. You should first consult a licensed Investment or Financial Adviser before acting on any of the information provided in this