Commercial Real Estate

Although roughly half the size of the residential housing market, the commercial real estate market is still twice the size of the total U.S. stock market, so its problems are too large to ignore. They include:

Lower Prices. The commercial real estate market didn’t top until late 2007, about a year and a half AFTER the top in residential real estate prices. But, since the top, prices are now down close to the same percentage, as the chart shows. During May and June commercial real estate prices have fallen 16%!

Financing Trouble. Almost 40% of the financing for retail, industrial and office space flowed through the securitization market. The securitization market has largely been shut down, effectively turning off liquidity for purchases and refinancing. As a result, in the first quarter of 2009 the delinquency rate on commercial properties rose 43%, and sales volume in the US fell 83% year-over-year in the second quarter of 2009.

Rising Supply. General Growth Properties, the second-largest shopping mall owner in the country, became the first large-scale bankruptcy in April. Vacancy rates are at a 20-year high, which is putting additional downward pressure on prices and rents.

Many loans that lenders hold on commercial property are classified as “whole loans,” so it behooves the banks to keep them out of foreclosure. A “whole loan” is carried on the banks’ books at par until it actually enters the foreclosure process. But, because the prices of properties have fallen so far, the underlying collateral is now likely to be less than the banks’ exposure should the loans sour. As a result, banks are attempting to delay foreclosures by modifying commercial real estate loans through interest rate reductions. Unlike the residential market, commercial properties have multiple tenants, so there’s at least some cash flow coming in. This cash flow is one reason banks are willing to modify troubled commercial loans. This stalling suggests that there are significant unrecognized commercial real estate losses currently hidden on banks’ balance sheets.

Deflation vs. Inflation

Charts from: www.dshort.com


The October 2009 Consumer Price Index for Urban Consumers (CPI-U) is 216.177. The annualized inflation rate computed from this number is -0.18%, which marks the eighth consecutive month of deflation.

Why does Fed so desperately want inflation? Because our economy can not recover in deflation. But even with so much stimulus money we put into the market, we just can not boost the CPI up enough.

There is no inflation yet, and we are still in the deflation nightmare. Investors have been told to buy gold to fight inflation. If there is no inflation, why do we fight it? And if we are in inflation, why only gold price made new high? Platinum, Silver, Copper, and agricultural products are still below last year's high, and oil and the CRB index are still below their highs of October 21.

We may see a little improvement in next few months, but the overall economy has a long way to come out of the deflation.

S&P500 P/E Ratio

TTM P/E ratio = 47.6
P/E10 ratio = 20.4

Again: "A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. "

Previous post: S&P500 P/E Ratio October 7, 2009

Market Wave: 11/13/2009

T-bone's Expanding Ending Diagonal count on SPX:

Here is the internal structure:

Expanding ending diagonal is rare and I can not remember we have any examples on Dow at any degree larger than daily level, at least from Prechter's book. But it seems to be a valid count for now. $VIX seems to have similar expanding triangle pattern as well.

Wave 5 of C in first chart could be truncated already, or it is going to make a new higher high around 1121 level.

From price wise:
1121 on SPX would be 50% retrace from the entire decline from October 2007.
10334 is the equivalent point on Dow.

Time relationship on Dow:
The entire decline from October 2007 to March 2009 takes 512 days.
50% retrace the time duration: 0.5 * 512 = 256
256 days from March 6 low would be November 17, next Tuesday !!

Time relationship between wave (W) and (Y):
If wave (Y) in time = 1.618 * wave (W) in time, the date to end the wave (Y) would be November 15, this weekend !!

Next week could be interesting ......

Game Over? (5): Topped Secondary Indexes

I put six indexes in above chart, as well as the US dollar index and Gold. Today Dow closed under 20 DMA but above 50 DMA. However all the other indexes closed under both 20 DMA and 50 DMA, the blue circles in the chart.

Russell 2000 Index, Dow Transportation Index, and Dow Jones Financial Index broke their October 2 lows, the red circles in the chart. If the double top pattern in these three indexes are confirmed, prices will turn much lower. I think the major indexes will catch up the secondary indexes, such as $TRAN and $RUT, on the downside to confirm that the trend has changed from upside to downside.

The US dollar index is tracing out a small but very clear 5 impulsive waves up, which can not be seen in daily chart, the green circle. The stock market has been fueled by weak dollar, so a turn up in dollar shall add more downside pressure on equity market.

Also S&P500, Dow and NASDAQ have all closed beneath the up-sloping log scale trend line connecting the March low and the July low. That gives us additional evidence that Primary Wave [3] is likely underway.

S&P500 Daily Chart - 10/23/2009

The last two trading sessions form a Bearish Engulfing pattern and the last three trading sessions are another bearish pattern called Stick Sandwich, see the last three candlesticks in above chart.

The Triple MACD negative divergences [TM] is triggered on Friday because the daily default MACD crossed on downside. Daily Slow Stochastic already crossed down one week ago.

An Email One Year Ago - Wave 3 of 3

This is the email I sent to my friends on October 04, 2008, when the most powerful wave 3 of (3) of Primary Wave [1] kicked off.

"Just checked some charts. I think we are in BIG trouble now"

"Dow will go under 10000 in next few days, if not on Monday. S&P500 will be under 1000 this month, if not in next week. We will see 1000 points down in one single day on Dow, and S&P500 will hit to 950-970 low this month."

"The worst case on financial side: C, JPM, BAC, GS, MS should be cut in half. I hope that C can keep alive longer after it decided not to merger with WB, and I believe that finally C can not keep it current status as it is now. It maybe gone forever or downsize into few small ones. Buffet's holding WFC will go down as well due to the WB merger, then the whole financial will collapse. It may take longer than I think. It also possible that the whole insurance industry collapses earlier than the left gigantic banks. So far 12 regional banks have gone, the number should go up to 10 times at least, and that is why FDIC needs UNLIMITED backup from congress, like Fannie and Freddie. FDIC is holding up taking over more bankrupt banks only because itself needs the bailout bill to get passed first."

"Watch it closely and at least keep 100% of your 401K in bond, if you can not short the market"

Looking back, I think I was right for most of my projections. And now, one year later, I think we are right at another critical point similar to that one. What you need to do is the same: "Watch it closely and at least keep 100% of your 401K in bond or just in money market fund, if you can not short the market"

Institutional Money Flows 10/21/2009

Charts from stocktiming.com:

Institutional Money Flows Chart:

Institutional Accumulation / Distribution Chart:


Previous charts:
Institutional Money Flows - 10/15/2009
Institution Money Flows - 10/02/2009

Market Wave - 10/21/2009

Beautiful charts from Kenny.



If it is indeed an expanding ending diagonal here to mark the Primary Wave [2] top, it seems we need one more up move to complete the wave structure. The last hour sell off today reminds me the 170 points down in Dow on September 22. Is today's drop just a pull back or trend reverse? We will know very soon.

Triple negative MACD divergences are shown in both charts above and MACD will cross down if we get another down day or two.

Advancing / Declining Volume Ratio

This is advancing to declining volume ratio chart I posted in "Market Wave: 10/05/2009"

Here is the updated chart for today. As the price makes higher highs, the advancing to declining ratio goes lower lows. Yesterday's reading was only 2.8 :1

Market Wave - 10/13/2009

Dan summarized everything in his SPX daily chart today. I labeled the rally to September 23 high as (W)-(X)-(Y), and he counts it as (A)-(B)-(C), but they mean similar thing.

This is one of the bullish wave counts, and remember that 1121 in SPX is 50% retracement level for the entire decline from 2007 October to 2009 March. You can see the Fibonacci retracement in Cobra's weekly chart below.

This chart also shows you the Fibonacci relationship from timing perspective.

• The rally from SPX 666 to 1080 high on September 23 is a Fibonacci 0.382 of the previous decline in terms of time.
  
• Inside the bear market rally, wave (C) is a Fibonacci 0.618 times wave (A) in time.
  
• Wave (A) takes 14 weeks and wave (B) and (C) together takes the same time.

It seems 1080 is a good stop point for SPX, but we will know soon whether market can make a new high to 1090 to 1121 level.

Dollar Story (5): We Are Close

I posted above chart 2 days ago and I expected a lower low. Today UUP briefly broke under 22.54, the September 23 low, and $USD index also declined under its September 23 low 75.827. This indicates that wave 5 down is not quite finished yet. But we are close to the bottom.

If wave 5 = wave 1,
then target of wave 5 = 24.43 - (26.83 - 24.80) = 22.40

Inside wave 5,
If wave [5] = 0.618 * wave [3],
Target of wave [5] = 23 - 0.618 * (23.68 -22.61) = 22.34

I am expecting a MACD cross down on above daily chart to trigger the final sell off on dollar, and then MACD will probably have a triple negative divergences.


SPX seems to be trapped in a trading range from 1019 to 1070. So many different wave interpretations and alternative counts. I do not have any preference so far. Let us watch the dollar closely because its wave pattern is much clearer than overall market. More important, when dollar goes up, SPX will go down.

Dollar Story (4): All Eyes on the Dollar

I posted advancing to declining volume ratio chart yesterday. This morning, the overall market carried the strength with a gap up open, and gradually pushed this advancing to declining volume ratio to 16, much higher than yesterday's close reading. SPX quickly pushed above 1046 orthodox wave (i) low. Dow went above 9666 and NASDAQ advanced to 2094. The strong rise invalidated my primary wave count because wave (iv) and wave (i) should not overlap each other.

The last two trading sessions open various interpretations on wave structure. A possible bearish count can label the rise from October 2 as another smaller degree wave ii. A bullish count would argue that the primary wave (Y) still has higher potential. We need more clues from market to have a clearer wave pattern.

Today's up move was fueled by weak dollar. Gold made a new high and silver were lagging. Now all eyes on the dollar. The first chart shows dollar's wave structure. We are in final minute wave [5] of the extended minor wave 5.

The overlapped SPX index shows you how the overall market negatively mirrors dollar's movement. You can download SPX and UUP daily close prices from Yahoo and do a simple regression test by using data from 2009 March low, and you will find their correlation is close to -90%. If the same pattern holds, dollar's bottoming process may continuously push SPX higher in next week or two.

The second chart shows an alternative wave count on dollar, which has a triangle wave 4 and we are only in minute wave [3] of 5. This count calls more bearish potential ahead.

Market Wave: 10/05/2009

Today's total volume is low compared to the last few selling down days, but the market breadth is pretty impressive. Above is NYSE "advancing volume to declining volume ratio" histogram chart overlapping with SPX index movement from 2009 March low.

You can see the advancing to declining volume ratio has been continuously decreasing during wave (W) and wave (Y), the red solid lines and the red arrows. However, we had two increasing ratios in corrective wave (X), the blue solid line and two up arrows in June and July, which indicate the market still had some upward momentum.

Today, we got a higher high close reading 8.97 on this ratio, meaning advancing volume to declining volume ratio is almost 9:1. During the entire rally from March low, when we got this kind high readings, market always would follow through and keep going higher. But if the trend already reversed from 1080, it may not work so well.

Now the argument goes back to the wave count: did we top at 1080?

In today's session, SPX broke up 1041 and closed above 1040. It is a bullish signal, especially with a 9:1 up volume ratio. Based on my wave (i) low at 1041.17, SPX violated wave 4-1 overlap rule. There has been a debate regarding where is the orthodox low of wave (i). It could be 1046 or 1041, depends how you label the wave (ii). Also Dow and NASDAQ were lagging today and did not violate their wave (i) lows. So the wave pattern is not very clear at this moment and we have to give market a little more time, one more session or two, to show its true fave.

But again, today's 9:1 up volume ratio should not be ignored and it brought some caution on the bearish count. If 1046 is taken out to the upside, it will invalidate my current count.

S&P500 Wave Structure: from 666 to 1080

It took 17 months for primary wave [1] to play out, started from 1576 and ended at 666, a stunning 910 points and 58% decline.

Primary wave [2] started from 666 in March 2009, and most likely already ended at 1080. The 6-7 months bear market rally carried SPX up 62%, the magic Fibonacci ratio 0.618. Primary wave [2] retraced 45% of primary wave [1] decline, satisfied the 38.2% minimum retracement ratio. The 50% retracement level would be 1121, which was my previous bull count target price.

If wave count in above chart for the entire primary wave [2] is correct, primary wave [3] already started from September 23 with all indexes in the process of tracing out a 5 waves down. The short term downside support will be 990 to 1000 area in SPX and 9250 to 9300 in Dow. 1040 would become a strong resistance for SPX.

Game Over? (4): Institution Money Flows

I borrow Cobra's chart from stocktiming.com

When institution buying (blue line) crosses down institution selling (red line), market starts distribution. That cross-down happened yesterday. From March low 666, this situation only happened at wave (X) of primary wave [2], when market pulled back in June.

Is this another buy dip opportunity? CNBC and Cramer will tell you "Yes!", but not me.

Game Over? (3): Wave Pattern Says Yes!!!

Dow broke below 9630.20 on Wednesday, around 11:00 this morning SPX went under 1039.47, and NASDAQ broke the wave [1] of C high in 10 minutes right before the close bell. The fact that three major indices all decline below wave [1] of C high in 2 trading sessions eliminated my primary (bull) count. So based on Elliott Wave Theory, the wave pattern called "Game Over".

In the first chart, I have the bear market trend lines connecting March low and July low for Dow, SPX and NASDAQ. Those trend lines are main support during the 6-month bear market rally started from March low. You can see both SPX (red line) and NASDAQ (green line) already closed under their trend lines. This is a strong signal that market peaked at 1080 and the trend reversed to down side.


Next chart, daily MACD diverges with price movement and already crossed down. The volume has been decreasing as market goes up. So technicals do not seem to support an upside movement any more.

The chart shows my curent wave count, which is my alternative before. Our bear market rally peaked at 1080 and we started a new down trend since September 24.

Conclusion: Game is probably Over!

Market Wave - 09/29/2009

1.7 points on September 25 saved market, so my primary count is still valid.

I label 1080 high as (b) of Expanded Flat wave [4], so it looks more consistent with wave [2] from both proportion and time duration perspectives. Also wave [2] is ZigZag and wave [4] is Flat, based on EW Guideline "wave 4 will almost always be a different corrective pattern than wave 2".

Today's high 1069.62 is Minuette (i) up of the Minute wave [5], and it has a clear small Subminuette 5 waves up from September 25 low 1041.17. We are now in Minuette wave (ii) or maybe (iii) up already. Minuette wave (iii) through (v) will carry the index to new high over the next week or two. Once we reach Minuette (iii) top, we can get more clues on the final target high for (Y). A break below 1039.47 (9630.20 in Dow) will force me to eliminate my primary count.

The alternative count (EWI's primary count):
We topped at 1080.15 on September 23. We finished Minuette (i) impulsive down at 1041.17, and we are in Minuette (ii) corrective up now. A break above today's high 1069.62 will jeopardize this alternative count.

BTW, EWI has an Expanded Flat as Minuette (ii) up. The problem for this count is:
a of (ii) = 1053.47 - 1045.85 = 7.62
c of (ii) = 1069.62 - 1041.17 = 28.45 > 2.618 * 7.62
Wave a of (ii) looks like too small, comparing with c of (ii).

Game Over? (2): S&P500 Future Under 1039

At 11:30 PM EST Sunday night, pre-market S&P500 future down to 1038.10 . Nikkei 225 index down 246.69 and 2.40%, Hong Kong Hang Seng index down 300 points and 1.47%.

The open bell at Monday morning could be very interesting. We do not have major economic or earnings reports on Monday. If we gap down and can not regain 1040 support level quickly, some technical indicators will be triggered to be bearish.

There will be a lot of noise this week starting from Tuesday. We will have September consumer confidence index and Case-Shiller home price index report due on Tuesday. Do we still remember one year ago that day? Dow crashed 777 points when government rejected $700 billion bailout plan. 2009 Q2 GDP will be due on Wednesday. On job market, we will have ADP jobs report on Wednesday, weekly jobless claims on Thursday, and September jobs report from the Labor Department on Friday. Could be a very challenging week for bulls. However, any upside surprise from those numbers, such as GDP, could push the market higher as well.

Game Over? (1): 1.7 Points Away

Here is my short term primary count for this bear market rally started from March 2009. I have been talking about this count for a while. My previous post "Bear Market Rally Top" has the count from Oct 2007 high to Mar 2009 low (this chart does not label it correctly). At this moment, we are in 4 of C of (Y) and we need a last 5 of C up wave to complete this more than 6-month bear market rally.

In terms of proportion and wave pattern, B of (Y) seems smaller than 2 of C. Normally we expect waves of larger degree to be larger. The potential problem on this count, again, once Dow comes under 9630.20 (1039.47 in S&P500), the previous wave 1 high from August 28 on this interpretation shown on above chart, I have to eliminate this primary wave count from consideration. "Wave 4 never moves beyond the end of wave 1", that is the rule. This kind of overlap has already occurred in Dow Transports ($TRAN) and Dow US Financials Index ($DJUSFN). I am not sure that these two are leading on the downside, or will "catch up". If more and more major sectors show same wave 1- 4 overlaps, the odds will favor the scenario that we have seen the top already. That alternative count will change B of (Y) to where the 2 is in the chart, and C and (Y) to 3.

Friday, S&P500 hit the intraday low at 1041.17 ---- 1.7 points away to call "GAME OVER!".