The 28 Year Cycle

I am generally leery of cycle theories that involve fixed intervals of years. Many of them are rooted in astrology and planetary cycles which I do not believe influence world events. However, it is possible that some of these time intervals could coincidentally be pertinent to the stock market for socioeconomic reasons.

One time-interval that does seem to have significance is a 28-year interval from one important high to another, and from one important low to another, first discovered by George Lindsay, a famous market technician of the previous century.

The 28-year cycle is significant now because 2015 is 28 years from 1987, in which there was a 2-month crash during Aug-Oct that dropped the Dow 41%. Thus, 1987 had both an important high and low, so the 28-year cycle suggests an important top, bottom, or both during 2015-2016.

Here are some previous instances that I have identified (give or take a year). All of the lows came after drops of at least 17%, with many being 20-30%.

Lows of 1982 & 2010 (or 2011)

Highs of 1980 & 2007

Lows of 1974 & 2002

Highs of 1973 & 2000

Lows of 1970 & 1998

Lows of 1962 & 1990

Highs of 1959-60 & 1987

Corrections of 1956-57 & 1983-84

Lows of 1946 & 1974

Lows of 1942 & 1970

Lows of 1938 & 1966

Lows of 1932 & 1960

Lows of 1921 & 1949

 

See my previous posts for more information on 2015.

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Update – Dec. 22, 2014

Given the strength of the rally today, with the Dow making a new closing high, I’m putting the Three Peaks Domed House count back on.

Dow three peaks domed house

A description of an idealized pattern can be found here.

If Points 3-7 span roughly 8 months (which is the case for the current instance), the rally from Point 14 to Point 23 is supposed to last 7 months and 8-10 days. In our case, Points 11-14 are missing. If you count from Point 10 instead, a top could be predicted for late-May 2015. By that time the Dow will likely be above 19000.

For the time being, I think the Middle Section described in previous posts is still valid, except that Point J would be moved to the Domed House top next year. However, it is possible that a new Middle Section will form during the Domed House rally, and if it does, I would give the new one priority.

Happy holidays everyone!

Wave Count – December 17, 2014

Dow december 17 2014

As shown on the chart, I think we are near a short term bottom given that there is a clear five wave pattern down from the Dec. 5 high. Historically, the market rallies in late December (the famous “Santa Clause rally”). The rally may top out around the highs of Dec. 9 or Dec. 11.

Looks like a major correction is underway – Dec. 16, 2014

I think that Monday’s session had significantly bearish implications. The fact that, on the Dow, after a 300+ point drop on Friday, and a 170 point drop after the open on Monday, the market couldn’t sustain the subsequent intraday rally, suggests that the bears are in control and the trend is now down.

As I mentioned before, I have identified a prospective Ascending Middle Section pattern on the Dow:

An Ascending Middle Section on the Dow:

Dow Ascending Middle Section 2014

Idealized Pattern here:

After Point J, the market is supposed to decline for an amount of time equal to the duration between Points E and J. In our case, that implies a drop lasting 8 months. For the time being, I think that over the course of this correction the Dow will return to its 2013 lows in the 14500-15000 range, and that the NASDAQ Composite and NASDAQ-100 will return to their April 2014 lows at 3946 and 3414, respectively. That equates to a correction of about 18% on both the Dow and NASDAQ.

However, if this correction does last 8 months, and the downward legs continue to be as sharp was what we’ve seen this past week, the indices would likely go even lower than those targets. From a cyclical perspective, it makes sense to have a correction now, but I don’t know why we are seeing panic behavior so early. In my opinion the news isn’t all that frightening now relative to what the bull market has previously endured. In our current situation, it is possible for the Dow to drop 30%, and the NASDAQ to drop 40%, in Primary Wave 4, without breaking Elliott rules for a normal five-wave advance. I don’t think the drops will be that bad but it’s worth considering.

 

 

 

If the uptrend is to continue, we need a bottom soon

There are three technical patterns that I am following now:

1. An Elliott Wave count on the Dow, S&P, and NASDAQ:

Dow Elliott Wave 2011-2014

2. An Ascending Middle Section on the Dow:

Dow Ascending Middle Section 2014

Idealized Pattern here:

3. A Three Peaks Domed House Pattern on the Dow:

Dow tpdh 2014

Idealized Pattern here:

The phase of the bull market from 2011 onward could easily be considered complete based on the Middle Section and the Elliott counts. The Three Peaks Domed House is the only pattern which implies continued upside. If the TPDH is still playing out, we have just begun the “five reversals” (points 15-20).

The Dow and the S&P are currently down about 4% from their highs. On my Elliott Wave
count, we are in an Intermidate-degree 5th wave following a rather extended 3rd wave. In my opinion this is a vulnerable phase, and I would not expect a subwave drop to be much bigger than what we’ve had so far.

If the selloff doesn’t slow down , or if the next big drop isn’t immediately followed by a strong rally, most likely a correction of 15-25% lasting 7-8 months has begun.

The Fed and the Stock Market

On the comments section of just about any news article discussing the stock market’s rise, I see numerous comments arguing that the Fed has created an artificial rise in stock prices since 2009 by flooding the market with fiat money. So, in this article I want to give an argument for why I don’t believe the stock market’s rally is artificial.

First, looking beyond daily or even multi-month swings, the direction of stocks should correspond to the direction of expected corporate earnings. All of the other things we hear about in the news (monetary policy, taxes, government spending, GDP, etc.) affect stocks only to the extent that they affect earnings expectations. The primary cause of falling earnings is a recession. Thus, as long as the economy is not contracting, stocks should rise. Granted, the market often tops/bottoms before the economy tops/bottoms, which is why I find Elliott Wave theory to be valuable.

Some have expressed the concern that, since economic growth has been slower than usual in this recovery, it is not justified for stocks to keep rising; therefore, the market must be artificially manipulated. However, slow growth, in and of itself, should not cause the market to fall given that slow growth is still growth. But because the stock market is forward-looking, when economic growth slows, recession fears surge which can cause market drops of up to 25%. If economic growth slows, and the Fed attempts to boost aggregate demand by sending more money into the financial system that banks could lend out, the stock market resumes its advance because recession fears subside. So, I do not deny that the Fed’s monetary policy indirectly influences stocks. But the Fed influences stocks by adjusting investors’ economic expectations.

If the stock market were artificially inflated, one way that could happen is through general inflation that causes all prices in the economy to increase, and thus stock prices to increase even though demand for stocks isn’t rising. However, the chart of the Dow, adjusted for the Consumer Price Index, still shows a very strong bull market since 2009:

Macrotrends.org_Dow_Jones_100_Year_Historical_Chart
Source: http://www.macrotrends.net

On the chart above, notice what happened during 1966-1982, when we really did have an inflation problem. The inflation-adjusted Dow fell 73% even though the nominal Dow went sideways!

Some have said that the Fed’s loose monetary policy results in low returns on all interest-paying investments, so investors automatically put all their money in the stock market since that’s the only place where you get high returns. I acknowledge that this effect has probably strengthened the stock market’s rise. However, this effect can only happen if stocks are expected to rise based on fundamentals. If investors think stocks are overvalued, or think earnings will fall, and thus expect stock prices to fall, they would rather invest in bonds and get a small but positive return than to invest in stocks and get a negative return. So, even if low interest rates are a tailwind for stocks, there still has to be a fundamental backing.

Perhaps the Fed’s biggest contribution to the bull market has been through making many investors skeptical of the market, and thus preventing a massive bullish crowd from forming that would herald a long-term top.