Jeff Cooper: Extraordinary Popular Crowds and the Madness of Delusions

“In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.” 
-Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

“Well, it's too late tonight to drag the past out into the light.” 
-U2, One

“Rats!
They fought the dogs and killed the cats,
And bit the babies in the cradles,
]And ate the cheeses out of the vats,
And licked the soup from the cooks' own ladles,
Split open the kegs of salted sprats,
Made nests inside men's Sunday hats,
And even spoiled the women's chats
By drowning their speaking
With shrieking and squeaking
In fifty different sharps and flats.” 
-Robert Browning, the Pied Piper Of Hamelin

Of course, the title of today's commentary is a mirror image of Charles Mackay's Extraordinary Popular Delusions and the Madness of  Crowds, first published in 1841.

There is a reason for tweaking the title: it may be said that the popularity of the crowd perpetuates the delusion that breeds madness… rather than popular delusions that foment the madness of crowds.

It's a chicken and egg thing.

Likewise, to twist the Robert Browning  line: “Ah but the reach of a crowds madness should exceed the grasp of its delusion, Or what's a hell for.”

Speaking of mirror images and bubbles, last week while looking in the mirror shaving, I couldn't help but wonder whether 2017 is a mirror image of 1720,m when the South Sea Bubble burst.

“In February 1720 an edict was published, which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution…”
-Charles Mackay

Interestingly, every time a new Fed Governor has been appointed in the last generation, instead of underpinning ‘good faith and credit', it has preceded a crisis of confidence.

Alan Greenspan was confirmed as Fed Chair on August 11, 1987. The '87 crash followed two months later.

Ben Bernanke's first term began on February 1, 2006, the market topped in July-October 2007 prior to the housing crisis.

Janet Yellen became Fed Chair on January 6th, 2014.

In September 2014, there was a mini-crash with the SPX down 10% in 3 to 4 weeks.

Then in the summer of 2015, another tremor hit the market with the SPX down about 12% in a few weeks.

Another tremor of about 12% over a few weeks hit in December 2015.

This week, President Trump is expected to announce his Pied Piper of money.

If as Wayne Dwyer said, “Belonging is the highest level on the pyramid of consciousness”, then herding is in full bloom.

The truth of today's tape is stranger than fiction.

The market has shrugged off countless square-outs, technical divergences, geopolitical concerns and cycles and natural catastrophes — any one of which would be a welcome excuse for a well-deserved correction — especially in the months of September-October which are the worst market months of the year and infamous for crashes.

Instead, this September and October saw the markets tiptoe through tulips.

We got a crash alright — a crash to the topside.

From near the anniversary of the 1987 top, 360 months ago, the SPX set a pivot low on August 21, which saw an explosive move begin near the anniversary of the 1929 top (September 3), 88 years ago.

Early last week, we noted that if it were not for the October 31 fiscal year-end for the largest mutual funds, we would have thought a correction had already started.

This left the door open to the SPX satisfying a square-out target of 2582.

Of course as mentioned above, the SPX has genuflected at several square-outs this year, including the March and August peaks, but went on to make new highs.

Not all square-outs are created equal.

As flagged for readers last week, 2582 ties to precisely 4500 degrees up from the 666 SPX low in 2009.

This may be an important harmonic of the significance W.D. Gann placed on the 45 degree angle and his 45 Years In Wall Street tome.

Additionally, it is worth noting that 2582 is 90 degrees square the March 6 low in '09.

Theoretically, 2582 squares the low while satisfying a 4500-degree bull run.

2582 is also 45 degrees from October 27… just as the 2134 May 20 peak in 2015 is 45 degrees square May 20.

At the same time, 45 years ago was the false breakout in late 1972 prior to the worst bear market since the 1930's.

Perhaps if the market holds up after October 31 fiscal year-end, it will continue to rally into year-end ala 1972.

Perhaps the market will tread water ala 2007 in order for managers to capture bonuses.

Be that as it may, a chart from a friend shows that the DJIA just kissed the upper rail of a channel defined by the important monthly pivot in 2010 and 2011 and the monthly lows in 2015 and 2016.

Drilling down to a weekly SPX shows that the index has been in its best rally of the year since late August.

The week of August 21 saw the first turn down of the SPX 3 Week Chart in 2017.

It coincided with a test of the rising 20 week moving average for a combo weekly 1 2 3 Pullback/Holy Grail buy setup.

In October, the index overthrew the upper rail of a channel that defined resistance since March.

Notably, the March pivot high was also a short-lived overthrow of this well-defined channel.

The presumption is if the index exceeds 2582 with authority it may be in the midst of a new leg up, marked by last week's outside up week.

However, trade back below the upper rail of the channel and back below last week's low will trigger a weekly Reversal of a Reversal sell signal (a reversal of last week's outside up bar) suggesting defense should be on the field.

Let's drill down further to a daily SPX to examine the action since the August 21 low.

Remarkably, the 3 Day Chart has not turned down since the August 21 low.

Wednesday's swoon undercut the 20 day moving average with Friday's action offsetting last Monday's Key Reversal Day.

The upper rail of a well-defined channel in effect since the August low lies just above.

With a Key Reversal Day being offset and an outside up week on the table, if the SPX does not see further momentum after October 31, it is suspect — with the idea of fiscal year-end window dressing trumping the tape.

Is the idea that 2017 is still a year of destiny in the stock market off the table with Friday's rip?

Is the runaway move since August evidence of a Buying Climax?

Let's take a look at a Fibonacci Swirl which embodies the Principle of Squares inherent in the Square of 9 Chart.

The Principle of Squares and Square of 9 is a way to measure movement on a non-linear natural logarithmic basis.

Notice each successive square is larger, according to the Phi ratio.

Notice the Fibonacci sequence in the spiral and how the NINTH square is 55.

This ties to W.D. Gann's  emphasis on the Panic Zone being 55.

We are in the window of 55 weeks from the pre-election low.

We are 55 years from 1962 and the Cuban Missile Crisis, which rhymes with North Korea today.

But let's take a look at a Fibonacci sequence from 1784 which was the end of the Revolutionary War.

Many use 1776 as a start date, but the end of the Revolutionary War is a good low and zero point to measure from.

So let's take a Fibonacci count from 1784.

1784 + 55 Fib years is 1839 and an economic crisis.

1784 + 89 Fib years is 1873 when a financial crisis triggered a depression that lasted until 1879.

1784 + 144 Fib years is 1928, one year before the 1929 top that preceded the Great Depression.

1784 + 233 Fib years is 2017.

Maybe the market has another year to run like 1928. Maybe.

Additionally, we are a Fibonacci 89 weeks from the 2016 bottom and 890 days from the May 2015 top.

Was Friday's FANG frenzy perpetuated by earnings in AMZN and MSFT a sign of climactic buying in a potential parabola year or a sign of another leg higher?

Conclusion. At the top of today's commentary is a quote from the Pied Piper of Hamelin

Like most folklore, it is rooted in actual history.

Hence the saying that truth often is stranger than fiction.

The story goes that the town of Hamelin was plagued by an unusual number or rats (the Crisis of 2008?).

A stranger from out of town wearing multicolored or pied clothes (Central Bankers?) showed up and offered to get rid of (QE, ZIRP) the rats in exchange for payment (credit?)

The stranger produced a flute and began playing a tune which all the rats in town followed him out through the gates of the city and into a river.

When the townsfolk saw how easily the piper had rid the town of rats, they regretted the amount that they had offered him and reneged on
their deal (debt?)

The piper, vowing revenge, returned and once more walked through the town playing his flute.

This time all the town's children (Equities?) followed him through the town's gate and disappeared, never to be seen again.

There is a reason that history repeats: we don't learn its lessons.

Ignorance of the future is rooted in blindness to the past.

Wealth cannot be printed.

Remedies for the irremediable are diabolical in their fascination but beguiling in their delusion.

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive. As the man looks back to the days of his childhood and his youth, and recalls to his mind the strange notions and false opinions that swayed his actions at the time, that he may wonder at them; so should society, for its edification, look back to the opinions which governed ages that fled.” 
-Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds