We Talked About This. We Never Thought It Would Happen.

So, here's what I've been thinking about:  What have we always said?  

We've always said:  

"No one will ever fix the problems in the system -- the overspending, the waste, the ever-increasing debt, the free money, the corruption, etc. -- because it will cause too much short-term pain to fix those problems.  Consequently, politicians will always kick the can down the road, and nothing will ever change.  At least, not until it all collapses in on itself."

I bet that already got you thinking in the direction I'm going here.

Okay, so now we have this guy coming into office vowing to fix those problems.  Given a mandate to fix those problems.  We have the "Department of Government Efficiency" ("DOGE") being created, specifically to fix some of those problems.  We're being told there may be mass downsizing and/or elimination of redundant and/or underperforming government agencies.  

We're being told that waste will no longer be funded, money will no longer be free, corruption will no longer be rewarded.

We're being told, in short, that the government firehose of loose cash that's been spraying all over the place for decades is going to be shut off.  Or at the very least, reduced.  Yes, the money that hose is spraying may be "fake money" (in the sense that it's not being generated by production, but by debt and the printing press), but it's still liquidity that's no longer going to be added to the pond.  

Historically, almost a quarter of the USA's annual GDP each year is government spending.  

Charts like the one below (from Zerohedge) suggest that it's been even higher recently:

We all know that the current pace of spending and debt (and the corresponding inflation) is unsustainable, so we all know that something needs to be done.  We've known this forever.  But this is the first time in my life that an incoming President seems to be aiming to actually do the dirty work required to downsize our behemoth bureaucracy, possibly in a revolutionary way.

This is the first time it's ever looked like something might get done.  What the market seems to not be taking seriously yet is: What happens if that "something" actually does get done?

What's that going to do to the market?

Well, let's try to hash this out a bit.  One option, of course, is for nothing much to change and the government plows on with business as usual.  That's always possible.  But for a moment, let's entertain the idea that Trump's administration follows through on its apparent intentions and actually starts slashing government spending.  As that happens, will numerous bubbles start popping?  If spending were to be slashed, I suspect we'd learn (from the fallout) that our government has been funding (intentionally or not) multiple "bubble microeconomies."  Those will pop.

As those pop, how much of all this will spill over into the broader economy?  Certainly some of it will.  Will that cascade into even larger bubbles popping?  Very possibly.  And if it does, we know that when large bubbles pop, there is a lot of collateral damage even to otherwise healthy markets (see: 2008).

Okay.  Now:  What about that short-term pain we always speculated would result from something like this?  Is there a way to avoid it?  Or were our past musings (i.e.- "no way to fix this without a lot of pain") correct all along?  Will the U.S. enter a period of deflation?  That seems likely.  Just as inflation results from adding "cash" (in our government's case, usually that takes the form of debt) without increasing production, deflation can result from reversing the flow of that cash.

The next question is:  In light of the goal, which seems to be "revamping the largest bureaucratic system in the world," what exactly is "short-term" pain?  Is it years?  Because one would think it's probably years.  It's certainly not "weeks."

So, these are a few of the things that have been kicking around in my head for the past week.  If Trump follows through on his apparent plans, it could cause a lot of pain for markets.  And even, potentially, for the economy at large.  One can argue that it's a necessary pain; in fact, many of us have argued that for years; i.e.- "The sooner we take this bitter pill, the better.  The longer we wait, the worse the pain will be."

But, thing is, we've waited a long time.  We've kicked a lot of cans down the road.  We seem to be nearing the time when the piper finally gets paid -- maybe not in full, but at least in part.  How much blood will be required to start squaring the debts of our generational hubris?

And will it be so much that it triggers a significant bear market?

Here, I want to refer back to something I wrote in March of 2020 (when I projected the Covid crash and the recovery from that crash).  Because this was one of the few times I talked about this specific date publicly:

Anyway, I got to thinking about all this because my long-term count has us approaching the end of Cycle Wave 5 -- and the end of Cycle 5 marks the end of a higher degree Supercycle Wave. And the end of Supercycle rallies is a huge deal. It's world changing. By my count, even the Great Depression was only at Cycle degree. Imagine something an order of magnitude worse, and you have Supercycle degree. I don't think we're there yet (I actually have the year 2025+/- as the window).

The year 2025.  Next year.  When, as we now know, the first-ever genuine attempt to correct our past excesses seems set to begin.  

If we make some assumptions, such as the assumption that a sizeable portion of the liquidity and "economic activity" supporting the current market is BS and the assumption that this will be eliminated:  What happens if that goes away forever?  How long might it take to get back to current levels in the market without all the BS driving it and/or bailing it out if it collapsed?  Would it take long enough to call the peak of that hubris a Supercycle Top?

The final question is:  Do VOTERS have the will to ride this out?  Everyone's very excited now, of course, but how excited will they be if the elimination of The Government Department of Departmenting for the Government causes the National Highway System not to pave a road leading to nowhere, which causes the paving company not to need a large order of widgets, which causes Widget Wonderland not to generate the sales it had grown accustomed to (under the old wasteful system) and causes it to go under, which causes them (the ma and pop voters) to not get the job painting all the local Widget Wonderlands fluorescent pink, which causes their paint company to go under, drowning in 1,198 gallons of hot pink paint?

What happens in midterm elections if that's the state of the Union in 2026 and the economy is in recession?  In that case, do midterm elections upset the power dynamic, leaving the job of fixing our excesses halfway done and permanently stuck in some weird state where things are both wasteful and useless?

Who knows?  Point is: There are a lot of unknown variables here.  Things could turn out spectacularly -- or not.  Or, things could turn out spectacularly in the end, with a lot of pain in the middle (this seems like the most likely outcome).  Or I guess (though it seems less likely) we could just sail through major changes with minor bumps along the way and the market could rally to a million.  Or -- and this is probably the final possibility, though again, seems less likely given the rhetoric -- nothing much happens and it's just business as usual.  

All of which means: This is a high variance situation with potential for high kurtosis, and the market doesn't seem to have given enough thought to any of it so far.  Maybe it will soon.  Trade safe.

SPX and COMPQ: Just the Near-Term, Ma'am

Since last update, the market has finally stalled a bit, so we'll cover the next near-term support and resistance zones.

The resistance zone is clearest when viewed through the lens of COMPQ and appears to be the median line of the blue uptrend channel.

Using SPX for support, the first support zone is obviously yesterday's low, which triggered a decent snap-back rally.  If SPX were to break that zone, things get a little trickier, because the most bullish near-term count has that break as pretty meaningless, while the most bearish near-term count (not shown) would be a bear nest -- and were this to be a bear nest, that could lead to a decent little correction back toward 5900 or below:

In conclusion, we have a couple zones to watch over the coming sessions, so we'll see how the market reacts to those.  I have some more thoughts about the longer-term picture, but they're still germinating, so I'll discuss them in more detail in either Friday or Monday's update, depending on when they've matured.  Trade safe.

SPX and COMPQ: Maybe, I Guess

Nothing much happened since last update, so -- barring an impulsive decline in the meantime -- we'll continue watching that potential SPX target from March:

And we'll keep watching COMPQ:

The question a lot of people seem to have is:  Does the election of Trump change anything?

Maybe.  The question I have is whether the seeds that have already been sown can be overcome by anyone at this point.

The problem is a good chunk of our GDP over the last few years has come directly from new government debt.  And the Treasury market is so far not playing along with the Fed's rate cuts, which means: one, that the market doesn't think inflation has abated enough and two, the cost of servicing that debt may remain high.  And while I suppose if GDP were to really boom, it would help that last chart -- all this is really just the tip of the iceberg, as far as America's problems go.  Is the election of a new President enough to solve all our problems?  Maybe, I guess.  But maybe not.  

So, I'll leave it at that for now.  We can come up with more bullish long-term counts if it seems appropriate.  Trade safe.

SPX, COMPQ, TLT: Powell's Well That Ends... Well?

The Fed did its thing yesterday and cut interest rates by another 25 bps.  Jerome Powell then did his press conference, and his eyes burned with defiance as he angrily stated that he wants everyone (and he means everyone) to know that he can't be fired, no matter what he does:

Powell then flipped off the press corps, spit on the stage, and broke into a seemingly impromptu and horribly off-key rendition of Frank Sinatra's "My Way."  Before leaving, he announced that the next press conference would be held underwater.  In Antarctica.  

That was good enough for the market, which continued rallying as it has since the election results were announced.  SPX managed to reach and exceed its next target:

I really don't know how much more upside remains in SPX, if any, but IF it continues to push past its target zone, then I'll continue to watch that crazy extended fifth target from March.  Anything seems possible right now, with the market behaving a bit crazy itself, but I'm also watching for any impulsive declines that might put a damper on things. 

COMPQ is still around, but there's nothing to add to the prior update (except it did confirm the b-wave high):

Finally, this seemed like a good time to update the long-running TLT chart.  I think I've been using this same chart for around a decade, though the very old annotations had to be booted along the way to make room for new annotations:

In conclusion, SPX reached its next target, so we'll see if it takes a breather or not.  TLT doesn't seem interested in Powell's rate cuts, and the Fed probably doesn't want to lose complete control of long-term interest rates, as a sustained decoupling could spell trouble for multiple asset classes and for the national debt.

The market assumes Trump will be good for the economy, but the question in my mind is whether that will be enough.  America has created quite a few problems for itself, such as the problem that much of the "positive GDP growth" we had over the past few years was funded in large part by government debt, further contributing to the ever-expanding wall of debt we're now facing.  Add to that the fact that the Fed may, sooner or later, again need to start "monetizing" that debt.  And if interest rates don't play along with the Fed's cuts, then the interest on the national debt will continue to skyrocket, and problems will multiply.  Anyway, I'm not sure a good economy can take root in this bloated environment without a reckoning first.  But there are just too many undefined variables right now to determine that with much confidence.  Trade safe.

SPX and COMPQ: They Didn't Make That One Easy

Last update noted that, though my faith had been shaken, I was still very slightly leaning toward another wave up.  As of this moment, the futures market is indicating a big gap up at the open (still 5+ hours to go, so that could change of course); since that matches my lean, I'll presume we get new highs one way or another.  Assuming those new highs occur, that will suggest two possible rally outcomes, discussed on the second chart below (COMPQ).

SPX first, though.  If SPX can sustain a breakout, it would still imply a trip 5940-70, as discussed on Oct. 28:

Next is COMPQ, which lays out the options, including a more-bullish potential pattern, simply because it can't be ruled out yet:

In conclusion, it appears the market will finally get another wave up.  We have some initial target zones to watch, assuming that happens, and a line in COMPQ that might suggest a longer bullish run.  Trade safe.

SPX, COMPQ, INDU, NYA: Careful Out There

Last update noted that bulls had been put on notice, today's update will go into more detail on the potential patterns.  I was having weird intermittent internet issues this morning, which cost me a couple charts, so today's update will be short on words, and we'll let the chart annotations do the talking.

Let's start with SPX:

Next up is COMPQ:

INDU:

And finally, NYA:

In conclusion, as we've known for a while, the market is potentially into the final fifth wave up from the 2022 lows, so it's a tricky position for bulls.  Thus far, we have no confirmation of an impulsive turn, so whether or not that was "it" for the bull market or not remains to be seen.  Given the pattern in the charts at this exact moment, I'd probably still rather see another wave up, but it's maybe 50.5/49.5 at this point, so a larger decline would not come as a surprise at all.  And against the possibility that the bull market is over, we don't want to get caught trying to pick up nickels in front of a freight train.  I'm far more certain that "the top is closer than the bottom," so be careful out there and trade safe.

COMPQ and INDU: Bulls Put on Notice

In Monday's update, I wrote:

If it breaks down before then, then there are still options for that decline to be a C-wave, but we'll have to start watching things more carefully, because, as we know (and as illustrated on the NYA chart), we are likely into a larger fifth wave. And my old personal adage is, "Never bank on fifth waves." For now, we'll continue to presume there are still higher prices out there, but I did want to illustrate that it's not a great place for complacency.

The market is now in the process of attempting a breakdown, so we do need to start watching things more carefully.  INDU is still three waves down, so it's not time for bulls to panic just yet, but the chart discusses some of the options in the event that the current decline goes on to become impulsive:

 COMPQ moved a bit higher, then reversed:

SPX invalidated its proposed triangle, but I'll present a more detailed chart on Monday.

In conclusion, we've known for a while that we were in the ballpark that a fifth wave could complete, so while it would still be nice to see one more wave up, the likelihood of that wave may be more deeply called into question if this decline becomes impulsive.  Trade safe.