Unseasonably Cold Quarter Ahead
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S&P 500 Index Winter Forecast 2009-2010
To this point in our search for a top to the bear market rally, we have examined conventional technical indicators and market analysis methods. The most advanced of these methods has been the Elliot Wave pattern identification approach, which is based on market psychology as it emerges in a series of robust fractals. These create an identifiable pattern in market indices which, when coupled with indicators of sentiment and market breadth, have all been pointing to a major top since August. However, the "alternate Elliot wave counts" have continued to prevail as the market has defied weak fundamentals and continued to reach new highs.Indeed we wonder if the Fed can continue to prop this market up indefinitely, all for the benefit of Wall Street fat cats but to the detriment of Main Street and our Nation altogether. A jobless recovery is simply not possible, in my view. And I expect that when the eventual, failed outcome is evident, public sentiment will turn en masse against the banks, the Federal Reserve and the US Government as a whole. This revolt will be the subject of an upcoming piece, but looks to be close at hand, at least based on a more advanced forecasting method. This method, Time Series Analysis, is the subject of our final installment in the search for a bear market top.
The figure below depicts a twenty week forecast of the S&P, based on such a time-series analysis. There are many methods to produce such a prediction, some of which are multivariate in nature and are based on fundamental data such as interest rate, unemployment, GDP, etc. Such econometric forecasts typically employ applied statistics and autoregressive moving averages. Indeed, the Federal Reserve endeavors to make such forecasts in order to identify (and presumably prevent) asset inflation.
If the Fed would only read Wall Street Greek, we could save them some work and a whole bunch of money. Allow us to simplify matters for the meddlesome eggheads: the Central Bank has indeed created a new bubble and it will soon pop.
Where most time series models are formulated in the time domain, the methodology behind this forecast is instead solved entirely in the frequency domain. Market cycles are analyzed to fit a mathematical model, which in turn is used to forecast future results. Economists and mathematicians may argue that such an approach will only work for a stationary time series; however, related details have been accounted for in this proprietary solution.
Will the forecast prove accurate? Time will tell. Indeed, the methodology is better suited to shorter term, higher frequency data. However, to this point, the weekly forecast has predicted only a continued rise in the index, whereas the data to the right of the vertical line on the chart clearly depicts the cold winter forecast ahead. When coupled with Elliot Wave predictions, a failed head and shoulders pattern, suspect fundamentals, and little or no top-line earnings growth, this prediction may finally indicate the top is in. Caveat Emptor!
Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only. Article may interest investors in NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX.
