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Russia: A Classic Elliott Retracement
Ratings Services: Late Again
The Russian Trading System Index (RTSI) posted its all-time high in March of this year, but since then that index and Russia's economy have suffered a huge shift in fortune.
The grim facts about Russia include a 78% fall in the RTSI, a $3.6 billion loss in international reserves, the ruble near a 3-year low against the dollar, and manufacturing indexes at record lows. But only on December 8 of this week -- almost nine months after the RTSI peak -- did Standard & Poor’s cut Russia’s debt rating, the first such downgrade since 1999.
This makes you wonder: what help is a ratings service that identifies risk after the fact?
The "reasons" for the Russian downgrade are a series of events, or so the media says. The central bank has spent tens of billions of dollars from its reserves to support the ruble, an issue cited by S&P. Over the last few weeks, the Kremlin has increased its bailout package to more than $200 billion and shifted from minimizing the crisis to warning of a long, painful slowdown. And S&P warned that if oil prices remain low, “Russia will run through all the $209 billion it has saved from its oil revenues…”
Rating services are chronically late because they herd alongside everyone else. A little over a year ago “Standard & Poor's Ratings Services said the Russian Federation's sovereign credit ratings are well-shielded against lower global liquidity” (Forbes-September 2007). S&P was comfortable saying this because others shared its opinion. At the World Economic Forum in late January, Russia’s finance minister said “I believe [we] will soon be the focus of attention as a haven of stability.”Back in August, Newsweek ran an article that said: “Russia remains the darling of fund managers, investment houses and producers of all goods….” The same article said Russia was the most attractive of the B-R-I-C economies (Brazil, Russia, India, and China), topping a Merrill Lynch poll of 200 emerging-markets fund managers.
Learn more about Alan Hall's original Global Market Perspective Special Report on Russia, Sizing Up a Superpower.
In addition to herding, there is another obstacle to a forecast worthy of the name: most people assume that events move markets. If that is so, you must assume that this week’s debt downgrade helped the RTSI, because according to marketwatch.com: “In Moscow, equity markets shrugged off the downgrade and instead posted strong gains…. The dollar-denominated RTS stock index ended up 7.2%, led higher by oil and mining shares. The ruble-denominated Micex stock index finished up 10%.”
Those gains sound impressive, until you apply the proper perspective. Namely, that to regain its 78% loss, the RTSI will have to rise 354%. Anticipation is valuable.
In November 2007 -- when the Russian economy thrived, Putin enjoyed god-like status and there were few signs of the Georgia conflict on the horizon -- we issued a 20-page Global Market Perspective Special Report, "Sizing Up A Superpower." It assessed the relationship between Russia's turbulent history and its then-current social mood, which had reached the kind of "historically unprecedented, positive extreme" that precedes an "extreme trend change" toward the negative.
The chart below appeared in that report -- it's been updated to show the price action in the time since, and includes the first two sentences. It also highlights one of the simplest and most reliable Elliott wave forecasts: a completed five-wave advance will usually return to the area of the previous fourth wave. Bob Prechter and A.J. Frosts’ book, Elliott Wave Principle, described this guideline in 1978:
The primary guideline is that corrections, especially when they themselves are fourth waves, tend to register their maximum retracement within the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of its terminus.
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Once again, a common Elliott price target has proven valid. If you want to anticipate a turning point in social behavior, don’t think like the herd. Use the essence of the Wave Principle: the knowledge that crowd behavior is patterned.
We wrote a special report about Russia because we saw signals of a completed wave pattern and a social mood peak, a turning point in its stock markets and society. On the other hand, Standard & Poor’s downgraded Russia’s debt this week because it has no other choice; the situation is painfully obvious.
You don’t have to be at the mercy of such “ratings” foolishness. As Robert Prechter's best-seller Conquer the Crash said in Chapter 25:
The most widely utilized rating services are almost always woefully late in warning you of problems within financial institutions…. Most rating services will not see it coming.
What’s next for Russia? The December Elliott Wave European Financial Forecast includes our wave count for the RTSI and social observations of Russia.