go the dragon
A “Melt-Up”?
The idea that the stock market will end its rally with a near-vertical advance is appearing in articles, interviews, newsletters, web posts and even emails to EWI. It is especially popular among super-bears who have long recognized that the market is in a bubble.The problem with this idea is that the Dow and S&P have never blown off. The stock market as a whole has never accelerated upward at a market top. It often accelerates off bottoms, and it always accelerates in the center of a third wave; but it has always lost momentum in a fifth wave relative to the third wave. Predictions for a blow-off defy history.
Commodities are the exception, as Frost and I pointed out in 1978 in Elliott Wave Principle (see text, p.173). In fifth waves of Primary and higher degree, commodities often accelerate upward before reversing. Recent examples include oil in 2008 and silver in 2011. The reason for the difference is that commodities peak on fear, whereas stocks peak on complacency.
Some people are arguing that the stock market has become “commoditized,” and that’s why it’s about to go into a parabolic rise. While we cannot say such an event is outright impossible, it’s never happened. One thing that does happen repeatedly in the stock market is for investors to raise their upside forecasts dramatically at a top. In 1999-2000, at the market’s true peak, books came out calling for Dow 36,000, Dow 40,000 and Dow 100,000. Today’s calls for a melt-up, then, are probably just capitulation to the bullish imperative, a rationalization of optimism. By this means, bears have switched from predicting a collapse to predicting soaring prices. In other words, “Sure, it’s a bubble; but it’s not topping now. In fact, it’s going to start going up faster!” These melt-up predictions are yet another indication that the market is close to a peak in the biggest B wave in recorded history.
This type of capitulation to the trend is different from panic, because it occurs at the opposite end of the psychological spectrum. There is no single word for it. Some people say things such as, “Investors are going to panic into stocks.” But the only people who can buy in panic are those who are short, and they typically constitute a very small percentage of investors. The stock market as a whole does not panic up. But it does occasionally experience a sudden crystallization of optimism. Usually it happens without much near-term price movement; it is the result of a long period of past price movement. We might call this event a cynap, the opposite of panic. When investors’ synapses snap, their opinions become aligned like particles in a magnet. That’s what we have today.
Meanwhile, the stock market has been losing upside momentum for seven months. This is how market tops have always formed, not with a rocket blast but with a subtly slowing ascent. Even in 1929 the market did not blow off; the rise that year was slower than the market’s rise in the second half of 1928. Is this time different? Well, so far it’s exactly the same in that people are saying it will be different.
One or two bears agree with us in being more vocal than ever about the risk in today’s market. Jean-Pierre Louvet of the SafeWealth Group reports on U.S. insolvency, bank woes, deflation and what "cash" means: http://209.10.98.87/SWR-SWMR_First_Quarter_2014.pdf. David Stockman knows it's a bubble and pulls no punches in saying how it will end: http://bastiat.mises.org/2013/11/david-stockman-its-20072008-all-over-again/
Robert
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