Still Going North
Market-cycle analysis suggests the stock rally could last five more months, at least
By MICHAEL KAHN
ON WALL STREET, THE AUTUMN BRINGS a change in the weather, marked by chilly mornings and frosty,
nose-nipping nights. For the stock market, however, the current forecast is balmy, and it's likely to stay
that way through the early months of 2004. Contrary to my earlier prediction that stocks would head south
in September ("Enjoy It While It Lasts1," July 7, 2003), market events have unfolded in a way that
suggests that the cyclical, or short-term, bull market is not over just yet.
According to market-cycle analysis, last month's correction appears to be just that: a brief interruption of
a bullish trend. Barring cataclysmic events like an act of terrorism, or another severe blow to the economy,
stocks will see several more months of gains. This might not be the most profitable stretch for investors,
but it beats the alternative.
First, a word about market cycles, which come in many sizes and flavors. Long ago, analysts discovered
cycles in business activity, which not surprisingly relate to stock-market performance. These cycles also
are the basis for many indicators dear to technical analysts, present company included. The 200-day
moving average, for instance, really reflects a nine-month cycle, while the 14-day relative-strength index is
a half-cycle for certain commodities, according to its creator, J. Welles Wilder, whose innovations reshaped
commodities trading.
A four-year Kitchin cycle in business activity -- named for economist Joseph Kitchin, who identified it in
1923 -- manifests itself in the so-called presidential cycle, or the tendency of the stock market to bottom
every 40 months or so. This probably occurs because the administration in power strives to bolster the
economy in the year preceding the next election. But technical analysts care little about causation, only
that such cycles occur and can be measured.
A decennial market cycle, as its name implies, corresponds roughly to the
10.4-year Juglar cycle of industrial activity, named for 19th-century French
economist Clement Juglar. It might seem illogical that a year ending in 5 would
outperform all others in a decade by a significant margin, but that is what we
can see and measure. According to Ron Griess of TheChartStore.com, since 1886
the market has risen more than 32% on average in years ending in 5, and fallen
nearly 7% on average in years ending in 0.
When cycles bottom together, moreover, the effect is accentuated, as it was in
October 2002. The four-year cycle bottomed in tandem with a 20-year, or
242-month, cycle -- the first time this occurred since August 1982, the dawn of
the great bull market. That auspicious anniversary notwithstanding, the annual,
or seasonal, cycle bottoms in October, as it did in a big way in 1987 and 1998.
Consequently, cycle analysts had good reason to look for a major low a year ago
-- and it seems they found it.
Tim Wood of Cyclesman.com is not convinced that last fall's low was the official four-year cycle low. But
he thinks the market has seen its seasonal top. Longer term, he expects the nine-month and 22-week
cycles to converge at a more important top in April-May 2004, an analysis with which I agree.
Let's return to my July assessment that September would mark a top of sorts, although not necessarily the
end of the cyclical bull market. For starters, momentum indicators at the time showed a market making
higher highs, but with diminishing power. In other words, each new high represented a lesser gain than its
predecessor, with the time between peaks shortening -- a classic sign that the bulls were growing tired.
Too, sentiment readings, chiefly opinion polls and trader surveys, were
at extreme bullish levels -- the sort last seen in March 2000 --
suggesting that "everyone" already owned shares. When the masses
agree to such a degree, there are few potential converts left. Indeed,
the crowd is far more likely to stampede in the opposite direction,
given the slenderest provocation.
Leadership in the market also took a hit last summer, when small
stocks began to underperform the Standard & Poor's 500 index after
outperforming since the March low. When old leaders falter,
bull-market trends demand that new ones come to the fore. We're still
waiting.
In the past two weeks, the market has broken down, and the bears
have emerged from their lairs to proclaim they will lead stocks lower.
So why am I reluctant to take a victory lap, and willing to proclaim
that the market probably is going higher? Credit the aforementioned
cyclical trends, and a few others cited by fellow technicians. As Tim
Hayes of Ned Davis Research said in a recent report: "The market's
overbought condition and excessive optimism point to a correction, but
deterioration in the market's internal health, monetary conditions and valuation has been far from enough to
make another bear market an imminent threat."
I concur. Two weeks ago, when the market was getting pummeled, the list of stocks making new 52-week
highs still was swamping the list of new 52-week lows. Something was going up, even if the indexes
weren't.
How high will stocks go once the correction of recent weeks ends? Historical precedent, the bedrock of
technical analysis, suggests another six months of rising prices.
So far, the current decade is shaping up much like the 1970s. Big swings in stock prices will both elate and
deflate our investing self-esteem, but at the end of the decade we could be about where we started. John
Bollinger of BollingerBands.com notes that the typical rally in this sort of market lasts about 12 to 18
months. That implies a market top early in 2004.
Last January, Ian McAvity of Toronto-based Deliberations Research charted the U.S. stock market since its
peak in 2000 against the stock market in 1929, the Japanese stock market in 1989 and the gold market in
1980. All these post-bubble periods unfolded along uncannily similar lines, leading him to conclude that the
bull-market move that started in March would last into the early months of 2004.
Nobody can predict exactly when, and at what level, a rally will end, but we can apply historical precedent
to current circumstances. Walter Deemer of the Market Strategies and Insights institutional advisory
service says the typical rally after a market bubble bursts lifts the Nasdaq 50% to 100%; since bottoming
last October, the Nasdaq has risen 70%.
Still Going North
Market-cycle analysis suggests the stock rally could last five more months, at least
By MICHAEL KAHN
ON WALL STREET, THE AUTUMN BRINGS a change in the weather, marked by chilly mornings and frosty,
nose-nipping nights. For the stock market, however, the current forecast is balmy, and it's likely to stay
that way through the early months of 2004. Contrary to my earlier prediction that stocks would head south
in September ("Enjoy It While It Lasts1," July 7, 2003), market events have unfolded in a way that
suggests that the cyclical, or short-term, bull market is not over just yet.
According to market-cycle analysis, last month's correction appears to be just that: a brief interruption of
a bullish trend. Barring cataclysmic events like an act of terrorism, or another severe blow to the economy,
stocks will see several more months of gains. This might not be the most profitable stretch for investors,
but it beats the alternative.
First, a word about market cycles, which come in many sizes and flavors. Long ago, analysts discovered
cycles in business activity, which not surprisingly relate to stock-market performance. These cycles also
are the basis for many indicators dear to technical analysts, present company included. The 200-day
moving average, for instance, really reflects a nine-month cycle, while the 14-day relative-strength index is
a half-cycle for certain commodities, according to its creator, J. Welles Wilder, whose innovations reshaped
commodities trading.
A four-year Kitchin cycle in business activity -- named for economist Joseph Kitchin, who identified it in
1923 -- manifests itself in the so-called presidential cycle, or the tendency of the stock market to bottom
every 40 months or so. This probably occurs because the administration in power strives to bolster the
economy in the year preceding the next election. But technical analysts care little about causation, only
that such cycles occur and can be measured.
A decennial market cycle, as its name implies, corresponds roughly to the
10.4-year Juglar cycle of industrial activity, named for 19th-century French
economist Clement Juglar. It might seem illogical that a year ending in 5 would
outperform all others in a decade by a significant margin, but that is what we
can see and measure. According to Ron Griess of TheChartStore.com, since 1886
the market has risen more than 32% on average in years ending in 5, and fallen
nearly 7% on average in years ending in 0.
When cycles bottom together, moreover, the effect is accentuated, as it was in
October 2002. The four-year cycle bottomed in tandem with a 20-year, or
242-month, cycle -- the first time this occurred since August 1982, the dawn of
the great bull market. That auspicious anniversary notwithstanding, the annual,
or seasonal, cycle bottoms in October, as it did in a big way in 1987 and 1998.
Consequently, cycle analysts had good reason to look for a major low a year ago
-- and it seems they found it.
Tim Wood of Cyclesman.com is not convinced that last fall's low was the official four-year cycle low. But
he thinks the market has seen its seasonal top. Longer term, he expects the nine-month and 22-week
cycles to converge at a more important top in April-May 2004, an analysis with which I agree.
Let's return to my July assessment that September would mark a top of sorts, although not necessarily the
end of the cyclical bull market. For starters, momentum indicators at the time showed a market making
higher highs, but with diminishing power. In other words, each new high represented a lesser gain than its
predecessor, with the time between peaks shortening -- a classic sign that the bulls were growing tired.
Too, sentiment readings, chiefly opinion polls and trader surveys, were
at extreme bullish levels -- the sort last seen in March 2000 --
suggesting that "everyone" already owned shares. When the masses
agree to such a degree, there are few potential converts left. Indeed,
the crowd is far more likely to stampede in the opposite direction,
given the slenderest provocation.
Leadership in the market also took a hit last summer, when small
stocks began to underperform the Standard & Poor's 500 index after
outperforming since the March low. When old leaders falter,
bull-market trends demand that new ones come to the fore. We're still
waiting.
In the past two weeks, the market has broken down, and the bears
have emerged from their lairs to proclaim they will lead stocks lower.
So why am I reluctant to take a victory lap, and willing to proclaim
that the market probably is going higher? Credit the aforementioned
cyclical trends, and a few others cited by fellow technicians. As Tim
Hayes of Ned Davis Research said in a recent report: "The market's
overbought condition and excessive optimism point to a correction, but
deterioration in the market's internal health, monetary conditions and valuation has been far from enough to
make another bear market an imminent threat."
I concur. Two weeks ago, when the market was getting pummeled, the list of stocks making new 52-week
highs still was swamping the list of new 52-week lows. Something was going up, even if the indexes
weren't.
How high will stocks go once the correction of recent weeks ends? Historical precedent, the bedrock of
technical analysis, suggests another six months of rising prices.
So far, the current decade is shaping up much like the 1970s. Big swings in stock prices will both elate and
deflate our investing self-esteem, but at the end of the decade we could be about where we started. John
Bollinger of BollingerBands.com notes that the typical rally in this sort of market lasts about 12 to 18
months. That implies a market top early in 2004.
Last January, Ian McAvity of Toronto-based Deliberations Research charted the U.S. stock market since its
peak in 2000 against the stock market in 1929, the Japanese stock market in 1989 and the gold market in
1980. All these post-bubble periods unfolded along uncannily similar lines, leading him to conclude that the
bull-market move that started in March would last into the early months of 2004.
Nobody can predict exactly when, and at what level, a rally will end, but we can apply historical precedent
to current circumstances. Walter Deemer of the Market Strategies and Insights institutional advisory
service says the typical rally after a market bubble bursts lifts the Nasdaq 50% to 100%; since bottoming
last October, the Nasdaq has risen 70%.
Post-bubble rallies unfold in three phases -- peak, correction, peak -- Deemer notes. The first peak in the
current rally ended last month, and if history is any guide, the second should occur nine to 12 months later,
in the summer of 2004. "The second peak barely eclipses the first, but this time it might not make it back
at all," he says.
That would mean the rally would run out sooner; if so, Deemer's timing would coincide with Bollinger's,
McAvity's and Wood's -- four different modes of technical analysis all pointing to similar conclusions.
Nobody's work -- not that of the analysts cited here, nor mine -- can predict with certainty where the
market will be at any given time. But by watching the ebb and flow of market prices over time, we can
establish a framework for our actions. When we boil it all down, it is just a matter of deciding to buy them,
sell them or hold them. If cycles past reappear in market action in the future, then those frameworks tell us
not to panic during a correction and look to re-evaluate our portfolios -- and take profits sometime in the
second quarter of next year.
Post-bubble rallies unfold in three phases -- peak, correction, peak -- Deemer notes. The first peak in the
current rally ended last month, and if history is any guide, the second should occur nine to 12 months later,
in the summer of 2004. "The second peak barely eclipses the first, but this time it might not make it back
at all," he says.
That would mean the rally would run out sooner; if so, Deemer's timing would coincide with Bollinger's,
McAvity's and Wood's -- four different modes of technical analysis all pointing to similar conclusions.
Nobody's work -- not that of the analysts cited here, nor mine -- can predict with certainty where the
market will be at any given time. But by watching the ebb and flow of market prices over time, we can
establish a framework for our actions. When we boil it all down, it is just a matter of deciding to buy them,
sell them or hold them. If cycles past reappear in market action in the future, then those frameworks tell us
not to panic during a correction and look to re-evaluate our portfolios -- and take profits sometime in the
second quarter of next year.
