OBSERVATIONS

January 9, 2018

Bitcoins and Monkeys

… and EASY MONEY

“The main purpose of the stock market is to make fools of as many men as possible.” Bernard Baruch

“I was 5 years old when the stock market crashed; I lost everything.” Dick Van Dyke

“I always wanted to be somebody, but now I realize I should have been more specific.” Lily Tomlin

Garrett Jones

(925) 820-0161

garrett111@comcast.net

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Bitcoins and Monkeys

… and EASY MONEY

It appears safe to say that the market has finally become quite easy to analyze. Let’s face it … it is so darn simple, in fact, that

hordes of people who have little to no knowledge of the market are getting it right … and many of them have been getting it right

for quite a while. Ironically, a lot of long tenured; seasoned; and knowledgeable professionals have not been getting it right …

and many of those have been missing the boat for quite some time. Maybe some of you remember that Bernard Baruch sold out

of the market in 1928. The young bucks of that day said it was too hot in the kitchen for old Bernie. Leading into 2000, just about

everyone knew that Warren Buffett was not in any technology stocks. Just like in 1929, those ‘twenty-something’ guys knew that

old Warren just wasn’t with it enough to get behind those tech stocks. Around that same time there were stories of doctors and

lawyers who were making so much money in the stock market that they dropped out of their professions in favor of the ‘easy

money’ in the stock market. Nowadays we are once again in fortunate times. It’s just too darn easy. There is no thinking required

… why waste the time in having a plan? You don’t need one. Discipline? What’s that? Just BUY! Don’t be an idiot … if you

hesitate, someone else is getting the easy money that could be yours. All the guys on the financial TV shows are telling you …

JUST BUY! The talk show hosts are telling you … your barber is telling you … the guy who fixes the cracks in your driveway knows

… the president is telling you … past presidents are telling you … dead presidents will tell you if you walk by the graveyard at

midnight. C’mon man!

Last week’s sentiment readings from Investors Intelligence were 59.75 bulls and 15.26 bears for over a 44 point spread. This is

the largest number of bullish investment advisors in 30 to 40 years. They aren’t alone as virtually every investor class is wildly

bullish. According to AAII, the retail investor has allocated the highest percentage of his portfolio to stocks vs. cash since the

dot.com bubble in 2000. Institutional managers have record low levels of cash relative to equities in their portfolios. Option

speculators are the most bullish they’ve been in almost 4 years i.e. their expectations are for the bull market to continue as

evidenced by the CBOE put/call ratio. Rydex reports that mutual fund investors are overwhelmingly invested in bullish mutual

funds relative to bearish funds. Investors are so bullish that they are borrowing money at the greatest rate in history (highest

margin debt measurement) to participate in the market. Stock traders are 95% bullish and are showing the highest bullish

readings in 11½ years (trade-futures.com).

Steve Hochberg of Elliott Wave International (www.elliottwave.com) commented “Today, we read that ‘Equity Euphoria Grips

the World,’ and that ‘U.S. Equity Melt-Up Already Obliterating Analysts' 2018 Targets.” These two headlines are highly significant

in that they use words that are never used unless the market has already risen significantly in both price and time: “melt up” and

“euphoria.” He also pointed out that one day after Elliott Wave Financial Forecast published a special section on “Bitcoin: The

Greatest Bubble of All Time,” it was announced that trading was halted in the shares of one of the stocks that was featured, UBI

Blockchain Internet. Finally, he stated that when the NASDAQ’s rally began in January of 2016, there were only 4% bulls – now

that number has grown to 94% bulls.

Once the bullish frenzy has set in, it is not too dissimilar to a ‘feeding frenzy’ by a group of hungry great white sharks i.e. they just

go for it. Logic … common sense … scary statistics, etc. have no place when the bull market finally gets entrenched. The excited

25-year-old kid with a new broker’s license who just learned the difference between stocks and bonds four months ago is the

most popular guy on the block. He’s selling the ‘drug of choice’ to the frenzied addicts. 1929? 1987? 2000? Wake up, man!

That’s OLD history … it has no bearing whatsoever on today’s market. Where’s that 25-year-old kid with the goodies?

My most recent dates for a potential turn were just after mid-December and this week. December 18th was a market

top that accommodated that first time window. While the December 18th top held the market in check for almost two

weeks, it wasn’t even able to correct 1% over that entire time. December is the strongest month in the strongest

quarter of the year seasonally. This December was no exception. Typical seasonality for December has bullish

expectations for the second half of the month leading into January 6th. After January 6th, the seasonality for the month

is no longer bullish until right around the beginning of the last week of January.

Probably the biggest argument for a correction is that ‘the most bullish seasonal period for the year’ is over. That

doesn’t mean that bullish seasonality is over. Typical bullish seasonality is from November to May. The other argument

that suggests at least the possibility for a correction is that we just completed the most ‘non-corrective’ year in stock

market history. Every year has had at least a 5% correction in the past. The typical year has a 5% correction every

71 trading days, on average – that works out to about three per year. Last year had none … and it didn’t even have a

4% correction either … OR a 3% correction, on a closing basis. So, a correction is monumentally overdue – which

does NOT guarantee one. The bull market is long in the tooth, too … and it is the only tenured bull market I remember

that has gained such strength after such a long period of economic mediocrity. However, one must remember the

market is predictive.

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The chart below is a monthly chart of the S&P 500. The study below is an oscillator that shows the various levels of buying pressure at different times. It is interesting to know that this month, while only about a week old, has greater buying pressure than the 2015 top – and much more than the 2007 and 2000 tops. The blue channel lines show the definitive market channel for the past 8 years. While the lows of late 2015 and early 2016 are quite a bit below the lower channel line, it is important to note that the closing prices are all within the channel. The light blue line on the chart is the closing price line and all closing prices are within the channel, as stated. As long as the buying pressure (see horizonal yellow line below) stays above the 2015 peaks, the more likely it is that we are in a third wave and not a fifth wave (in my humble opinion). This means that once this current wave completes, there should be an A-B-C correction for a wave 4 and then a wave 5 to take the market to final new highs. We will not know until the end of the month if the buying pressure will continue to remain at its current level or higher … or reverse. Note that the peak in buying pressure precedes the actual price high. In 1999, the buying pressure peaked in the third wave. It did virtually the same in 2007 and 2015 – they just weren’t as visibly obvious on the chart. The current buying pressure is implying a third wave, however, a large reversal during this month could alter that view. Meanwhile, the market is again challenging another upper channel line. One of these days, one of these channel lines will hold. This lengthy channel has the benefit of a near term channel (in red) which is also having its upper channel line challenged.

It is important to note that 2007 looked like ‘the end of the road’ (at that time) – that’s why I have labeled it the “real” or ‘non-manipulation’ top. Note the red labels for waves 3, 4 and 5. The wave 5 in 2007 was only slightly higher than the wave 3 in 2000 and there was a strong divergence in the oscillator, as one would expect. The selloff that followed broke the prior low (2002) – also, as one would expect. What followed was a logical retracement of the wave 5 (2007) that peaked in 2011. This activity was all due to the ‘manipulation’ of QE (quantitative easy) and ZIRP (zero interest rate policy). The activity that has followed the 2011 low is a testament to what government and FED ‘tinkering’ can do to what should be ‘normal’ market activity. Normal market activity morphed into bizarre in the run from 2011 to the 2015 top. Sanity returned at that top and the market had a meaningful correction into the 2016 low. Bizarre activity again has dominated the market from the 2016 low. The prior year didn’t have one healthy correction. The greatest degree of correction in 2017 was less than 3% on a closing price basis – that is unheard of in prior stock market history. This confirms ‘bizarre’ in spades. The only benefit of this knowledge is to ‘expect the unexpected’. Market breadth for quite some time has been “underwhelming”. Yesterday, for example, advances were 1669 to 1223 declines – that’s just 1.36:1. For the NASDAQ, there were 1487 advances and 1482 declines. When you have a bull market that is as relentless as this bull market, one would expect that there would be days where there were 3, 4, and 5 or more times advances over declines. The fact is that there have only been three days where advances over declines exceeded 2 to 1 over the past four months. For such a relentless bull market with such ultra bullish numbers, they aren’t being seen in market breadth. That is a statistic that the seasoned investor will keep in the forefront of his mind. Rotation and corporate buybacks have continued to keep this market afloat. All good things do come to an end at some point. At the moment, that point remains in the future.

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One of the factors that is of concern for our never-ending bull market is margin debt. I’ve shared this chart before in one form or another. This particular chart shows margin debt plotted with the S&P 500. It is important to recognize that this chart plots the S&P 500 in real terms. That is why the S&P is lower at the 2007 peak, when its actual price was slightly higher. Margin debt vs. market price was more extreme in 2007 and resulted in a deeper correction than in 2002. Note that margin debt currently has been above the real value of the S&P 500 throughout almost the entire bull market. In 2000, it was never above the S&P. In 2007, it just moved above a few months prior to the top. Currently, margin debt is not only significantly higher, it has been above the S&P 500 for 9 years.

What does this mean? Well, time will tell – it would seem that the current positioning is much more dangerous and that once this situation reverses, the ultimate correction should be severe.

At this point, I would like to share a chart with you that most people don’t often see. The chart is the Global Dow chart – it is a 150 stock index of companies from around the world where only blue chip stocks are included in the index. All 30 Dow Jones Industrial stocks are included as well as some of the Transports and Utilities. With respect to other countries, it covers both emerging and developed markets. The components are equally weighted which means the price movements of large companies have no greater impact on the index than smaller companies. The base level is 1000 as of December 31, 2000.

The general pattern of the index shows tops at similar times to the DJIA or the S&P. A top in 2007; a bottom in 2009; a high in 2011 and 2015 and a higher market currently. What I find interesting about this chart is the 176 week cycle I have shown. So far, from the 2007 high, there was a top 176 weeks later in 2011. There was also another top 176 weeks from the 2011 top. We are now very close to another 176 week cycle with the market very extended. It should prove interesting. Let’s look at the S&P 500 cash index. We already had a good idea of how it looks over the long term due to the chart on page 3. The chart at the top of page 5 focuses on the current rally from the 2016 low. Obama was still president at that time and remained in office for the next 8 months. Note that the blue channel lines confine the entire move from that February 2016 low. The S&P made a move from the bottom of the channel to the top in the first two months. It then remained flat for the next six months into the November election. Since Trump’s election in early November of last year, the market has been on a consistent and relentless climb to new highs. The initial four months after Trump’s election was almost a vertical move. The market moved sideways for only about one month of that time. For the next 5½ months, the market continued higher, but did so with very little gain into the August 21 low. That is where the lower red channel line begins. From this point, the market has made a very similar climb to the advance that was made right after Trump’s election. At this point, the current price advance is just slightly

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greater than the initial advance and it has taken just a bit more time. Does this mean that the current advance is just about over? I don’t think there is any real reason to expect the current advance has to end just because it has run a similar course to the initial advance. It’s not the worst reason either, but the fact that price has run to both upper channels is a much more valid reason. This market is notorious for breaking trend lines and upper channel lines, so we have to be very suspect … even though a correction is well overdue. It should be noted that this bull market has not had much to make it a bull market … other than its positioning in the Long Wave cycle. Consider that most of the news media is controlled by the Deep State and hates Trump (because he intends to eliminate them). Every late-night talk show host is anti-Trump … and some don’t seem to talk about anything else. Consider that the last president was a Saul Alinsky advocate and he was in office for two terms. Note: if you don’t fully understand what ‘a Saul Alinsky’ advocate means, you should read Rules for Radicals by Saul Alinsky. I bring this up for a very important reason … Hillary Clinton and Bernie Sanders are both Saul Alinsky advocates. That means that these folks have influenced a lot of voters to be in favor of socialism. One might think that is an ‘IQ test of sorts’ because there isn’t a successful socialist government in operation. I believe it is safe to say that the majority of Americans are, therefore, in favor of socialism (add Obama supporters + Bernie supporters + Hillary supporters). If you aren’t concerned by this direction, you probably should be. This thought process vs. the thought process of Trump supporters is what is the basis for civil wars. Speaking of wars, we are in the process of some serious ‘sword rattling’ with North Korea. I heard just yesterday morning that we are on defcon 1. It is pretty clear there is a good deal of corruption in the FBI and the CIA. We are still dealing with concern over the Clinton Foundation and its ‘Pay for Play’ agenda. While the special counsel has been looking for corruption with Russia from Trump (for just about his entire term), it is quite clear that Hillary Clinton HAD DEALT with Russia. Hence, the double standard of the Deep State. It seems that any of this stuff at any other time would have been definitely bearish … if not, catastrophically bearish. We have all this stuff in spades now … and, apparently, it’s bullish. I have to admit that I must not be intelligent enough to comprehend why all of the above would be bullish. However, it is truly remarkable with all of those negatives (and please note that not one of those negatives included the really big problems of debt; 85 years into a cycle; etc.) that the market is doing what it has been doing. We are truly at a very important junction … right now The chart at the top of this page points that out. We have finally reached the upper definitive channel of the current leg of this bull market … for only the second time. We are currently more overbought than at any other time since we have been in this 2 year channel. The chart at the top of the next page is very important as it clearly shows this position. My indicator below the chart in yellow shows that now that we have reached both the long term and the short term upper channel lines, we have become more overbought than at any other time. Note that the last time that we were close to being this overbought was back in November of 2015. This led to a 14.4% market correction. It was the last double digit correction we have had since that time. It is that correction that launched this remarkable 2 year run.

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Crying Wolf We have pointed out these upper channel lines before … and, for whatever reason, the market has pushed through them. The current situation may be no different and such a warning may strike a resemblance to the old fable The Three Little Pigs and the Big Bad Wolf. So far, the pigs have been in the brick house. Crying Wolf actually refers to the little boy who cried wolf to warn everyone … and, like now, the wolf never came. The little boy was scorned … until the wolf finally decided to show up. Both stories apply to the current market to some degree. I remember this clearly in 1987 and in 2000. Both were extremely robust and persistent bull

markets. Warnings were ignored, and investors became arrogant. But when the tables finally turned the long side investors were ruined in most cases and those playing the least risk side of the market were handsomely rewarded. It is a horrible feeling having the market advance relentlessly when it is historically overbought to a seasoned investor. It is pure agony during the wait. However, there is nothing quite so sweet as paying your dues at those times and then seeing the bear market emerge – because there are few better feelings than making money when everyone else is losing.

The positive side of being extremely overbought (as currently seen above) is that it states the obvious – the market is strong. Oddly, there are some signs of internal weakness already this morning. As I write this, the DJIA is up over 100 points and there are over 300 more declines than advances. Normally, this indicates that something is wrong with this picture. I also have one of my internal indicators diverging, as well. This should result in a near term top this week. If the market somehow holds with a couple of closes above the trend lines, then that must be respected.

The market has reached and exceeded a large round number in 25,000. In the past, these ‘big number’ accomplishments have halted advances, on occasion. The 1000 level of the 1966 to 1983 period may be the best example. Poor market breadth is frequently a hint, as well. This market has only had three days of 2:1 advances over declines in the past 4 months. 2:1 advances are usually a commonplace event. This set up a ‘Sign of the Bear’ signal from Peter Eliades (www.stockmarketcycles.com) on October 9th of last year. The signals can be coincident or lead the market by as much as 4 or 5 months. The point is that these signals have a strong record of signaling bear markets. For example, there were signals in 1968 around the December 1968 major top for secondary stocks and there were signals in late 1972 prior to the major bear market of 1973-74. The last two signals warned of the April 1998 top for secondary stocks (this top lasted for almost 10 years in the Value Line Geometric Index) and the September of 2000 top in the New York Composite index. Until the October 9th signal, there had not been a signal in 17 years.

We are in a conducive time period for a correction to begin. Such expectations for the past 481 trading days have met with disappointment. Maybe that is another reason. We’ll just have to wait and see. Please be sure to read the brief ADDENDUM that follows. It addresses the title of this issue. GJ

Best regards,

NOTE: THIS E-MAIL REPRESENTS THE VIEWS OF THE AUTHOR AND IS INTENDED FOR EDUCATIONAL PURPOSES ONLY. THERE IS

RISK OF LOSS IN ALL TYPES OF TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

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ADDENDUM

Bitcoins and Monkeys … and EASY MONEY

Unlike everyone else on the planet, I don’t know enough about Bitcoin to impress anyone. I know that Bitcoin is the premier cryptocurrency and that it is the currency that gave blockchain technology validity, at least to the common man. I’m not quite sure whether I know more about monkeys than I do about Bitcoin and blockchain technology, but I have known about monkeys a lot longer. Here’s a little story involving monkeys that may be useful with respect to Bitcoin and other cryptocurrencies … and maybe even the stock market: Note the final comments below.

Some final thoughts: Unemployment is down to 4.1%; Black unemployment rate is the lowest in history (since they have been keeping those records); there has been a massive reduction in needless regulations and the economy is responding; GDP is up and seems to be headed higher. The last time unemployment dropped to 4.1% was in 2000. What’s the point? The stock market tops with GOOD news.

This is the current price of the cash S&P as I finish up this issue. The two trend lines meet at a price of 2770 on January 11th. Will that stop this market

advance? I don’t know, but it is an obvious area where the market should experience resistance. It is also the date of the market’s top in 1973 – when President Nixon was dealing with Watergate. That was also the first major top in the current long wave cycle (“Every 40 years or so, something BAD happens”) That happened exactly 40 years after the Great Depression economic low (when the banks closed). That was the last time in the cycle when “something REALLY BAD happened. We are due for another ‘really bad’ once this upward action completes. Due to the momentum, I wouldn’t be surprised if the market went to a higher high after the anticipated correction. We, of course, have to have that elusive correction first. GJ