Weekly Update: Nothing Lasts Forever. NOTHINGI vividly recall a few years back having just finished labeling the above chart of the SP500 from inception. I labeled the chart and included most of the historical events that occurred over the course of that time. As a trader, I wanted to have a quick reference visual picture of price action during war time, innovation, and societal change, juxtaposed on my EWT count.
Afterwards, I plopped on the couch and wanted to “Veg Out”. As a full-time trader and analyst, my mind was kaput. Exhausted... I wanted to watch something on TV that required no more of my brain energy. I turned on the History Channel and subsequently settled on this series called, “Life After People”. As the series progressed, I went from mentally exhausted to engaged. The simple summation of the series was that despite us having built sky-scrapers, cities, bridges, etc., if people we’re no longer around, the sum of the proof we ever existed on earth would eventually get overrun, deteriorate, and the final result would be recycled by the planet into the sum of its elemental parts.
The series referred to this process as Entropy. I wondered if the time I spent laboring over the machinations of price action since pre-industrial America was in fact, the natural order of progression. Birth and death. Start and finish.
I looked up the definition of Entropy and here it is.
Entropy is a scientific concept, as well as a measurable physical property, that is most commonly associated with a state of disorder, randomness , or uncertainty . The term and the concept are used in diverse fields, from classical thermodynamics, where it was first recognized, to the microscopic description of nature in statistical physics, and to the principles of information theory. It has found far-ranging applications in chemistry and physics, in biological systems and their relation to life, in cosmology, economics, sociology , weather science, climate change, and information systems including the transmission of information in telecommunication.
Every known thing, will eventually succumb to Entropy.
I found the concept of entropy, captivating, thought provoking, and I couldn’t help but wonder if entropy applies to what I do. I’m a full time trader. When I am asked what I do for a living, that is always my response. But I also associate with being termed a financial pattern analyst, an Elliotition, or just a plain ole’ analyst. As an Elliotiion, I practice the financial forecasting principles discovered by RN Elliott in the early 1930’s. My association with Elliott Wave Theory (EWT) was a normal one, as I never conceded price action was random. Even as a young investment banker in my twenties, I always had this nagging notion, that however subjective or complex the stock market appeared to be, that eventually a simple construct would emerge that would lift the veil of the random, to allow for a more scientific methodology to answer the movements of stock prices and markets.
My introduction to the principles of Elliott Wave Theory started that quest for answers to seemingly unanswerable.
In Elliott Wave Theory, counter-trend patterns such as waves 2, 4 and B, are areas of potential complexity. It is within these particular wave degrees that some of the most obscure financial price action patterns come into view. From triangles, to WXY's, and the gamut of pattern complexity carves out their shapes here. To even the most seasoned Elliotition these areas can cause confusion, mislabeling and undoubtedly, uncertainty. In the intermediate sense, they mean less. But when observed in the larger cyclical timeframes, these areas are always associated with economic and/or societal change.
The last financial supercycle waves took place on October 1929 wave (I), and April 1932 wave (II). Post 1932, financial prices have advanced seemingly unabated for 90 years. During this 90-year timeline, humanity has advanced in technology, medicine, communication, etc…all of which have impacted living conditions and average life span. These advancements changed migration patterns, mobility and communication.
I can’t help but think, is now the precipice of where our 90 year advance and the natural order of entropy have hit a tipping point and henceforth, entropy now has statistical favor?
Granted I am not skilled to discuss societal matters or medicine, etc…but from an analysts perspective…Is flat to down now the path of least resistance in the markets for the foreseeable future?
Along the way of the 90 year advance in the SP500 you can see the historical events that have occurred and their impact on price action. Those price action sub-divisions were the result of the best and worst of times post 1932. My children, now grown adults, were financially shaped most by the 2008 financial crisis. However, in the grand scheme of super-cycles…you can barely make out those declines on the above chart. The final anecdote I’ll share is in 1991, when my wife and I bought our first home. Making what we believed to be one of the largest purchases we would make in our young lives, we watched mortgage rates as they flucuated. Then, we pulled the trigger to lock in rates, due to a short term dip, and at the time, felt we were wiser than most. So happy with our shrewdness in locking in 9.75% APR on a 30 year fixed mortgage. In retrospect, mortgage rates never went back above 10%. The last two decades, fiscal policy was on a longer term trajectory to 1-3%. We were not the gurus we made ourselves out to be back then. Maybe that trajectory down was a reversion to the mean in the post Larry Summers Fiscal policy of the mid to late 1970’s. Seems so now with the benefit of hindsight. But now it feels like that again…but this time the reversion to the mean is a post Ben Bernake fiscal policy. I can’t say for sure, as I do not posses that kind of foresight with respect to interest rates.
What I can say, is having analyzed 150 years of price action, financial entropy is starting to rear it’s head. If this is in fact starting price action of a supercycle wave (IV). The buy and hold strategy is dead. This will be a traders market for at least the next two decades, or more. Case in point…observe the area in the red box on the above chart. This area is a primary circle wave 4 of one lesser degree within a cycle wave III. That wave 4 consoldation lasted from 1996 until the beginning of 2013. That was manageable. That was also 17 years of price action digestion from the previous 1974 stock market bottom.
Since our previous supercycle events, we have experienced wars, advancements in technology, medicine, migration patterns OH AND WE EXPERIENCED a global pandemic. Mirroring what led up to previous (I), (II) wave degrees.
I don’t post this to scare readers, nor do I seek ANY attention. I do not ever see myself as being referenced as the trader who called the top of some market in some time. I forecast these things to evaluate if I can make money as a trader from the forecasts. In conclusion, I’ll leave you with one of the wisest quotes I ever heard as it pertains to what I wanted to achieve as a trader when I started. Its not from a wise greek philosopher. Its from Cuba Gooding Jr. in the 1996 movie Jerry Maguire.
“I’m already famous…now just show me the money”
