CRB

SNC , CRB (Jeffries), AGU , RDS.a and the B-Wave.

Hamilton

In EW terms the B-wave is normally the mid-wave in an A-B-C, correction, (by definition 3-waves). They tend to have an inordinate amount of symmetry and seem to ignore all fundamental information being almost oblivious to the rest of the world. There are 2 basic problems with the B-wave. First of all what may be 3 waves now can always develop further into 5 –waves and thereby stops being a B-wave. Next they can, and often do, rise above the origin of the preceding A wave which, intuitively, seems to make no sense. Yet it happens like clockwork and sometimes with a margin of about 30%. Despite this , it still is a B-wave. Here are 4 examples (there are literally dozens of them right now).

snc jan 2011 CRB jan 2011

and AGU.

AGU jan 2011 b-wave RD jan 2011 2

Typically the B-wave will retrace 50% to 62% in most cases, sometimes more and , if it gets that far, it frequently double tops, as in SNC above. The symmetry is nearly always present for reasons I do not understand, markets just love symmetry. In most cases that means that waves c and a in the B wave are equal (as vectors). This is pretty much the case with all four examples. In some cases the symmetry goes further and all 3 sub-divisions in the B-wave are vector equal, as, again, is the case with SNC. Anytime you observe this symmetry it pays to be very careful as once the B wave is complete, it is right back down often to below the starting point. If by some oddity the top should occur at a rather precise Fibonacci number (61.8) as for instance with the Canadian dollar in Oct. of 2001 or 2002 and now with SNC, I would get out altogether.

The TSE, the Liquidity Trap and Commodities.

Hamilton

Euro Nov 2010 CRB nov 2010

 

The TSE has a lot of commodities underlying it and these tend to be the last things to peak in bull cycles. The reason for that is that at zero interest rates it is the only game in town. I will add two more just to drive home the argument.

moo nov 2010 cow nov 2010

The “liquidity trap” occurs when interest rates are so low that the demand for money becomes perfectly elastic, which also happens to be the point where the Fed. has rendered itself irrelevant and impotent as monetary stimulus ceases to work. Put another way, you can open the flood gates but you cannot control where the water will flow. It flows into commodities as they constitute a real asset that may rise in value if for no other reason than that everybody is buying them. This is all the more so when commodities represent just a fraction of the capitalization of all investible assets and  works exceptionally  well when the funding currency, the US $ , is expected to drop in value. It is perfectly circular and consequently it is hard to say where it will stop. Certainly in this  environment , in which misinformation is rampant (see last weeks payroll number trumpeted with great fanfare as up by 159K, while the broader, barely mentioned,  household stat. was down 330k !) and where the prevailing investment philosophy seems to be entirely predicated on a ‘’ après nous, le déluge”, which may be exactly what we should expect sooner than later.

Given the equitization of commodities and the consequent artificial increase in demand it is hard to say when this has to stop. What we do know is that regardless of the  level of equilibrium between demand and supply in the end the marginal cost of production will be what the market will gravitate to (for gold that is about $400 or so, natural gas about $4 as so many have learned the hard way). Alternatively the income affect of ever higher prices over extended periods, like now with oil, will outweigh other stimulus factors and the whole thing will collapse The TSE is the single greatest recipient of these factors and now that QE2 has been formally launched ( perhaps that was the deluge?) it could be hurt the most.

Just look at how well all these charts correlate. Pork-bellies are of course the classical cyclical asset that performs with text-book precision every time. Also, the financials particularly the best one, RY, appears to have completed its a-b-c correction and has started its next down leg as anticipated a little while ago.