Counts from the Middle Section Update (3/19/2016)

As I described last fall, I think that a George Lindsay pattern known as an Ascending Middle Section occurred on the Dow Jones Industrials Average during 2014. The chart below shows the count I was using back then, along with two other potential counts that have developed.

Possible Middle Section Counts Dow 2013-2016

Last fall, I considered December 2014 to be a “fundamental” top for the market due to the obvious fading of strength that followed, even though it crept to new highs in the subsequent spring. Thus, I labeled December 2014 as Point J. The Middle Section expects that the length of the rally from Point E to Point J will equal the length of the decline from Point J to the second Point A (which I am labelling AA to reduce naming confusion). Since Point E to Dec 2014 was 8 months, and Dec. 2014 to the Aug. 2015 low was 8 months, the count appeared to be successful.

But then the market went for a nosedive earlier this year. However, that swoon did not take out the Aug. 2015 low on the Dow, so the count just described is still very possible. However, the recent correction has opened the door to other possibilities.

Suppose that Point J was actually the March 2015 top. In that case, E-J equals the duration from March 2015 to the Feb. 2016 low. So, this is a scenario to keep in mind.

Or, suppose that Point J was May 2015. In that case, a market low is projected for June 2016. Under that scenario, we do not necessarily need a new low on the Dow in June. If the market were to have a steep correction in June after failing to make new highs by a significant margin, that could fulfill this scenario.

So, what do each of these scenarios mean for the future? Well, the Middle Section expects that the duration from Point E to Point AA will equal the duration from Point AA to a major top.

Using AA-1 on the chart above, the projected top is December 2016.

Using AA-2, the projected top is December 2017.

Using AA-3, the projected top is August 2018.

It is probable that one of these tops will end up being the ultimate peak of this bull market, followed by a 2-5 year downturn (I’ll post more on this sometime later).

If we were to get a bull market top in 2017-2018, that would fit another George Lindsay time counting method. Lindsay believed that major tops occur 15 years and 3 months after major lows, and major lows occur 12 years and 10 months after major peaks.

I approach this timing methodology with a lot of skepticism. It’s hard to think of any fundamental logic to substantiate it. However, I have reviewed market history since the 1920s looking for examples of these patterns, and it does appear that there may be some significance to these time intervals IF you start counts only from very significant lows/highs, and give or take a year (sometime later I’ll post examples). Perhaps, these time intervals coincide with patterns in social trends, human psychology, or business cycles, in a way that affects the stock market. While I would never hinge a market outlook on these time intervals, they might be worth noting.

Anyhow, if you count 15 years from the 2002 lows, you arrive at a major top during 2017-2018. This timing could make sense from a macroeconomic perspective. If no unexpected shocks to the U.S. economy occur in the near future, it will probably take at least until the 2017-2018 time frame for the Fed to raise interest rates to level that could trigger a recession.

Intermediate-to-Long Term Bullish (3/7/2016)

In response to some key economic data that was released in the past couple weeks, I have decided to return to my intermediate-to-long term bullish outlook for the U.S. stock market after having neutralized my stance in mid-January. I expect the market to trend higher over the course of this year, although steep pullbacks could occur along the way.

Manufacturing (according to ISM) contracted again in February, but the rate of contraction slowed, almost to the neutral line.

The latest Empire State Manufacturing Survey showed a contraction that was slightly shallower than the prior month.

The most recent Philadelphia Fed Manufacturing Business Outlook Survey showed only slight contraction, holding steady from the prior month.

Non-manufacturing business activity, according to Philadelphia Fed and ISM, showed growth in February. The former increased slightly and the latter increased moderately from the prior month.

Atlanta Fed GDPNow’s Q1 forecast was +2.2% as of March 4.

Employment growth in February was moderately strong by the standards of the current recovery, with net job creation of +242,000 (according to BLS), +214,000 in the private sector (according to ADP), and the U6 unemployment rate ticked down to 9.7, after having held steady at 9.9 for two consecutive months (BLS).

So, what to make of all this data? Well, the weakness in manufacturing has been going on for almost a year now. If this were going to send the broad economy into recession, I would have expected employment growth to be falling sharply by now and the U6 rate to be rising. However, given that overall employment growth is still relatively strong a year into the economic slowdown, I take this to mean that the economic slowdown is not a prelude to recession. The Q1 GDP forecast is more evidence of this. And it seems that manufacturing (where most of the weakness is concentrated) may have started to stabilize.

So, with the economic backdrop appearing to be stable, I think the stock market will trend higher over the course of this year even if sharp pullbacks occur along the way due to weakness in certain areas of the economy, or further Fed rate hikes. The damage done to market sentiment over the past year has been enormous. I feel like the bearish camp got as crowded as it could be without a recession to double the capacity.

Soon I will also post an update on my application of George Lindsay’s Counts from the Middle Section for the current market situation. My previous projection (with a bull market top in December of this year) is still valid, although the recent market swoon opens up the possibility that the bull market will extend to late-2017. The latter projection would fit another long-term Lindsay pattern very well, which I will also discuss.