This Long Term Update will take a slightly different flavor than the last one (Update on Long Term Projection (08/17/12)) since I will be adjusting my count from the 2011 correction based on how the waves have been unfolding. I will show my rationale for that adjustment. But first I want to set the stage for the reason why I still think we are in the middle of this cyclical bull market, and not near the end of it.
The are a large number of market internals that still saying very strongly that this bull market is intact. I have discussed all of these several times, please see Long Term Projection, Macro, and an Analysis Retrospective for a detailed discussion and links to previous analysis and charts going back to a couple of years now.
Corporate Profit Margins still have not peaked and are making new recovery highs alongside the market. And as I have pointed out before, even if they peak this quarter the stock market will likely not be at a peak. This divergence takes several quarters/years to play out as the profit margins peak and the fundamentals start deteriorating long before the analyst community is able to confirm it.
The VIX continues to make new recovery lows as the market makes new recovery highs. If a peak in the market were to happen in conjunction with a VIX recovery low, then it would be completely counter to the 2000 and 2007 peaks which saw very pronounced VIX divergences for over a year.
The NYSE Advance/Decline Line as well as the NYSE New High/New Low Line is still making new highs alongside the NYSE Composite. Both of these displayed significant divergence for several months at the 2007 top. Now there is an issue that I have brought up before using the NYSE internals (see: NYSE Common Stock Only Indicators) and an analysis with them is less compelling due to the proliferation of fixed instrument / bond funds on the NYSE thus making less of a solid proxy for the stock market. But I still think it is still more useful than not useful.
When looking at the strength of these internal measures (fundamental, volatility, and technical) I continue to be convinced that we are still in the middle of this cyclical bull market and not near the top of it.
In November/December I was thinking that we were in the middle of an Intermediate term correction. By mid-December it was quite obvious that was the wrong call and all we had experienced was a Minor Degree pullback on no divergence. You can see the count from my last Update on Long Term Projection (08/17/12) and why I was thinking that, which was obviously the incorrect count.
So I have been thinking a lot about the long count over the last few weeks. I was waiting for a new recovery high to cinch my theory and that has now been confirmed. The crux is that the wave behavior since the major 2011 correction is markedly different in character than the wave behavior before the 2011 correction. I outline the differences on the next chart:
I had been previously thinking that lack of Daily divergence at the early 2012 pullback meant that it was likely only a Minor Degree correction. Based on seeing three confirmed and completed pullbacks since the major 2011 correction and we can now compare sizes and durations, I am no longer of that opinion. I think the early 2012 pullback was an Intermediate correction, and that the form is different than the pre-2011 pullbacks.
The depth and severity of the mid-2011 correction and the fact that it did not end the cyclical bull market has changed the outlook of market participants. I think they are much more convinced of the viability of this cyclical bull and are more willing to 'buy the dip' on any sharp pullback (whereas prior to 2011, people were nervous and would wait for 'one more leg down' before buying the dip). This is making for corrections with spike bottoms on no divergence.
There is a loose analogy with the 2002-2007 cyclical bull market where the corrections before 2005 have a somewhat different flavor than the corrections after 2005. It is not as pronounced as what we are seeing now, but I think the precedent is there.
So with that observation made regarding the wave behavior and the observations made in the first section that show internal measures still confirming that the cyclical bull is intact, here is my updated long term projection.
Long Term Projection History and the Current Projection
I have a long track record of being consistent with my projection. It has obviously adjusted based on how events actually unfolded (absolutely *nobody* can predict the future), but this long term projection which serves as my preferred count has been quite good in general directionality and intermediate timing.
-- Nov 2010: Abandoned the Primary 2 count and adapted my leading alternate count which was a Cycle X count - The Large Count
-- Jan 2011: Rethought the size of Cycle X with some historical analysis and comparisons. I lay out my thoughts for March 2009 - June 2011 (projection at the time) being only Primary W of Cycle X - The Large Count with Historical Perspective
-- Jan 2011: Macro thoughts that accompany my projection - Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?
-- Feb 2011: Long term context - Secular Bear Market Projection in Historical Context
-- Mar 2011: An in depth study and a comprehensive list of references and analysis of previous work. I highly recommend reading this post and following the references - First Derivative of the S&P 500, Long Term Study
-- May 2011: Count of the large structure (the top of this wave) being completed in real time - May 5 (and a Long Term View Update)
-- Aug 2011: Macro thoughts in the middle of the August crash putting this wave in context (specifically refuting that this was the start of 'P3') - Update on Long Term Projection
-- Oct 2011: Real time count that pointed to the October low as being a significant low based on how the waves and indicators unfolded - Revisiting the Large Count
-- Jan 2012: Confirmation of the October low being a significant bottom - Update on Long Term Projection
-- Apr 2012: Large macro, fundamental and sentiment update. In depth post and a recommended read (many links to previous analysis) - Long Term Projection, Macro, and an Analysis Retrospective
-- Aug 2012: Projection calling for a late 2012 correction, however the degree of the pullback was misidentified - Update on Long Term Projection (08/17/12)
Primary Wave Projection
As noted above in the Wave Interpretation section, the early 2012 pullback is now assumed to be an Intermediate Degree correction, and the flavor of the wave behavior after mid-2011 is very different to the wave behavior before mid-2011.
Secular Bear Market Projection / Long Term Count
For the SPX:
And NASDAQ Composite for good measure:
4-year Cycle Chart
This chart comes from this study (A Look at 4-year Cycles) and fits pretty nicely with my long term projection. I think the next pullback would fit timing wise with the next 4-year cycle bottom (which as I show on my chart can simply be a mid-range correction).