This may give some support for your theory this guy is predicting a big rally late in the year.
The Bullish, The Bearish, & The Defiant Cycles News & Views by Tim Wood, CPA April 4, 2003
The Bullish Argument
The starting point for my bullish case has to begin with the October 2002 low. This is so because this is the last major cycle low. I know that October 2002 was a seasonal cycle low. The October low has now been tested and the low has held. As a result let’s now assume that the October low will continue to hold. By doing so, we are in effect saying that the October low was also the 4-year cycle low. Remember, when trying to determine if a cycle of one degree has bottomed, you must look at the cycle of the next smallest degree as well. When the cycle of the next smaller degree (in this case the seasonal cycle) makes a higher low, you then have solid confirmation that the cycle in question (in this case the 4-year cycle) has bottomed. My point is, if we expect to see the October low hold as we move into the next seasonal cycle low, then by definition we are saying that the 4-year cycle has bottomed.
Look at the weekly Dow chart below. Notice how each seasonal cycle, marked with an “S” has bottomed below the previous seasonal cycle bottom. This confirms that the larger 4-year cycle was moving down. Now, if we get a higher seasonal low, the 4-year cycle will have turned up. So, with a 4-year cycle low in place, we should expect to see the market advance for the duration of at least one seasonal cycle.
I can also argue that October 2002 was the 4-year cycle low based on the count. Going back to 1896, the 4-year cycle has averaged 47 months in duration. From the 1998 4-year cycle low to the October 2002 low was 49 months. The count was almost perfect.
I can also present a bullish case from a Dow theory perspective. On March 10, 2003 the Transports closed at 1,982.56, which was below the October low close of 2,013.02. Given that the Industrials did not violate the October low, we now have a Dow theory non-confirmation. This non-confirmation can be considered bullish because the Industrial’s failed to make new lows as the Transports did.
The Lowry 90% days are also issuing bullish signs. March 10, 2003 was our first official 90% down day for this decline. Lowry is now saying that from a practical standpoint January 27, 2003 was also a 90% down day. Then, on March 17, 2003 this down day was backed up with a 90% up day.
I have presented the best evidence at hand in building a bullish case. This bullish evidence is also my counter to the bearish argument.
The Bearish Counter
My counter to the bullish argument must also begin with the October 2002 seasonal cycle. My primary argument is based on the fact that I question the October 2002 low as being the 4-year cycle low. This doubt is based on the lack of solid confirmation at that time. For starters, the sentiment remained bullish at the October low. Historically, 4-year lows scare investors to death. I now want to review a few of the items that were discussed in the January issue of Cycles News & Views. I see this review necessary because of the significance of the data.
The lack of fear at the October low can be seen when examining the Lowry 90% data. I combined my study of the 4-year cycle with Mr. Desmond’s 90% study and I found that with only 2 slight exceptions all 4-year cycle bottoms since 1940 (this is as far back as this data was made available) have been formed with a series of 90% days as described in Mr. Desmond’s research. For more information on 90% days, please see the January issue of Cycles News & Views or you can visit Mr. Desmond’s web site at http://www.lowrysreports.com Think about it. The timing of the October 2002 low was ideal for the occurrence of 90% days. We had moved into the timing window for the seasonal cycle low and the timing was perfect for the 4-year cycle low. My question is, how can it be that the October 2002 low is a more important low than the March 2003 low? The March low was higher in price and produced 90% days, while the October low was lower in price and failed to produce a single 90% day. I find this a bit strange and it could very well be a warning. We have now recorded another 90% down day on March 24, 2003.
Further evidence of the lack of confirmation can be seen when examining Peter Eliades’ CI/NCI readings. Peter stated in his January newsletter, “There has never been an important market bottom in the history of the data going back to the 1920s with the CI/NCI ratio above 0.980 as it was in October 2002.” In October 2002 the CI/NCI ratio was above 0.980. When Peter sent me the information on his CI/NCI indicator he stated: “As a general rule, important long-term bottoms occur with readings between .925 and .965. Important market tops occur with readings between 1.035 and 1.080. These are the normal limits for important tops and bottoms. Intermediate market bottoms generally occur with ratio readings of .980 to .995.” For more information on Peters CI/NCI ratio, you can also see the January issue of Cycles News & Views or you can visit Peter’s web site at www.stockmarketcycles.com
My point with the two paragraphs above is that I find it hard to believe that two indicators with such a long and proven track record have failed. I find it even more difficult to believe that they have both failed at the same time. Anything is possible and there is always a first time for everything, but what are the odds?
Let’s now review the timing aspect of the October low as it pertains to the 4-year cycle bottom. From the January issue of Cycles News & Views I stated: “Out of 26 4-year cycles, 9 have extended past 49 months. That is 35 percent. Of the 4-year cycles that have extended beyond 49 months, these cycles averaged 56.44 months in duration. If this 4-year cycle has indeed extended, the next window of time for it to bottom is with the next seasonal low and that bottom is not ideally due until October 2003. That would take the 4-year cycle count out to about 61 months, depending on the timing of the seasonal cycle bottom. This is not outside of the historical norm. The longest extension was 68 months. This was for the 4-year cycle from July 1932 to March 1938. The 4-year cycle from April 1994 to September 1998 was 56 months. The 4-year cycle from August 1982 to October 1987 was 62 months.” At present, it appears that we could have an extended 4-year cycle on our hands.
In reviewing all 4-year cycles going back to 1896, I found another interesting phenomena related to the seasonal cycle counts and cycle structure. I found that 23 seasonal cycles have occurred after the formation of a 4-year cycle top and prior to a 4-year cycle bottom. In other words, I found multiple occurrences of 4-year cycles that contained multiple seasonal cycles from the 4-year top, down to the 4-year bottom. If you look at the monthly Dow chart above, you can see a current example of this. See how we have now completed 2 full seasonal cycles (marked with an “s”) as the market has declined from the 4-year cycle top in 2000. Notice how each seasonal cycle top has occurred below the previous seasonal cycle top since the 4-year cycle topped back in January 2000. The 2001 seasonal cycle topped in 2 months. The 2002 seasonal cycle topped in 6 months. Of these 23 seasonal cycles none of them have ever advanced above the previous seasonal cycle top. Another interesting finding was that all 23 cycles made lower lows than the previous seasonal cycle. The average duration of all 23 cycles was 3.78 months. There were only 2 occurrence of cycles with counts greater than 6 months from low to high. In other words 91% of these cycle counts from low to high was 6 months or less. In applying this to the current scenario we have a seasonal cycle low that occurred in October 2002 and as it stands today we have a potential top that has occurred in only 2 months. That potential top being, the December 2, 2002 high at 9,043.37.
Now, I want to examine the current structure of the seasonal cycle and the related statistics. Going back to 1896 I found that 97% of all seasonal cycles that top in 6 months or less, after a confirmed 4-year cycle top, have taken out the previous seasonal cycle bottom. In this case, the 6 month count begins at the October 2002 low and would end with the last trading day in April 2003. Also, in applying this to the present scenario, we have a potential top that has occurred in only 2 months, that being December 2, 2002. Remember, at this point we don’t have concrete confirmation of the 4-year cycle bottom. As I explained above, that confirmation will come once we see a higher seasonal cycle low, which in this case would be above the October low. If you want to assume that the October 2002 low was not the 4-year cycle low, then we now have a 97% probability of seeing a decline below the October 2002 low, thus proving that October 2002 was not the 4-year cycle low. If you do not want to make the assumption that October 2002 was not the 4-year cycle low, then ignore this statistic altogether.
However, the next statistical fact that I can offer on the seasonal cycle should not be ignored. That is, 73% of all seasonal cycles that top in 6 months or less have historically taken out the previous seasonal low, without regard to the 4-year cycle. This 6 month count begins at the October 2002 low and would end on April, 30 2003. This is a KEY point to remember at this time. In light of this statistic, both the October 10, 2002 low and the December 2, 2002 high come to center stage. From the October 10, 2002 intra-day low the market rallied into the December 2, 2002 intra-day high. As it stands today, this was a mere 2 month rally. In addition to that, the monthly oscillator has topped out. This is suggesting that we could have seen the seasonal cycle top. Remember, we have to see the coming seasonal cycle low occur above the October 2002 low in order to confirm the 4-year cycle low and thus developing a bullish expectation. However, we now have the monthly oscillator that has topped and to date we have a high for the seasonal move that has occurred in only 2 months. On top of that, the seasonal statistics suggest at least a 73% probability of a decline below the October low, if we don’t see an advance to new highs, for the seasonal move, occur in May or later. When I say new highs I mean new highs for the seasonal cycle. I don’t mean new market highs.
In the event that we do see the market rally to new highs for the seasonal move in May or beyond, probability would then suggest that the October 2002 low would hold as we move into the coming seasonal cycle. You might argue that this would then be very bullish and in the short term it likely would be. In reality this could prove to be an even more bearish scenario based on history. I say this because of the absence of 90% days, at the October low, and the CI/NCI reading explained above. Therefore, if October 2002 does prove to be the 4-year cycle low, I would argue that it is the weakest 4-year cycle low on record and this would tend to indicate that an even harder decline could be in our future once the 4-year cycle turns down.
If we see the October 2002 low violated, it would then be illogical to argue that it was the 4-year cycle low. By doing so, it is suggesting that we had a 4-year cycle top, which would have occurred in only 2 months. This is possible, but believe it or not, I can’t force myself to be that bearish.
Next, let me address the Dow theory bullish non-confirmation. Let me begin by saying that I have a tremendous respect for Dow theory and I do not take this Dow theory non-confirmation lightly. It should indeed be viewed as a warning. Now, let me add that I also have tremendous respect for cycles and that I view cycles as a road map. They serve to keep you on the right path. Cycles allow you to segregate moves into advances and declines of various degrees known as cycles. As you know, cycles can then be quantified and expectations can be developed that are based on those quantifications, as I have illustrated above. The road map is telling me that until we see a rise to new highs for the current seasonal cycle in May or beyond, we have at least a 73% probability of a decline below the October 2002 low. So, basically it’s the timing of the bullish non-confirmation that concerns me.
Let’s now combine cycles with Dow theory as we look at an example of bullish non-confirmation occurring at the wrong time in the cycle. Another way of saying this is that I want to see bullish non-confirmations occur at the right time in the cyclical picture. Then I have both the Dow theory confirmation as well as the cyclical timing confirmation. Please look at the weekly DJTA chart below. At “point A” we have the beginning of a large scale Dow theory non-confirmation. The week ending March 23, 1973 the DJTA broke below both the 1971 and the 1972 seasonal cycle lows. If you now turn to the weekly DJIA chart also below, you will see that on March 23, 1973 (point A) the industrials had held above the 1971 and 1972 seasonal cycle lows. Even as the DJIA sold off into the December 1973 seasonal cycle low (point B) it continued to hold above the 1971 seasonal cycle low. Thus, the large scale non-confirmation was still in force and at that point became a bullish non-confirmation. In addition to this bullish non-confirmation the DJIA also registered several 90% days. The 90% down days occurred on November 19, 1973, November 26, 1973 and again on December 12, 1973. Then, on January 3, 1974 the DJIA registered a 90% up day. What more could the bulls have asked for? A seasonal cycle low was in place, a Dow theory bullish non-confirmation was in place and a string of 90% down days was followed by a 90% up day. The light truly appeared to be green for the bulls at that time.
Now, if we bring cycles into the picture, I will show you how it should have been relatively easy to see the serious decline setting up. By monitoring the cyclical picture, the avoidance of serious losses and even knowing when to enter the short side of the market could have been revealed.
Let’s now look at the cyclical facts that were relevant at that time. We would have known that the last 4-year bottom occurred May 1970. We would have known that the 4-year cycle had topped out in January 1973 because we had taken out the 1972 seasonal cycle low. We would have expected to see the 1970 4-year cycle low hold as we moved into the next 4-year cycle because it topped out in 32 months. This is far beyond the 20 month mark. I’m sure you are all familiar with this number as it relates to the 4-year cycle. If not please let me know. It had also been 43 months from the previous 4-year cycle low. This was somewhat on the early side for the 4-year low, however I suspect that many people were likely thinking that the new 4-year cycle low was also in place.
If the traders and investors of that day would have been monitoring the seasonal cycle they would have seen the cyclical warning. That warning came from the seasonal cycle as the market rallied out of the December 1973 seasonal cycle low. This rally began as the intermediate term weekly cycle moved higher. The weekly cycle topped out in March 1974 and began to move down into the weekly cycle bottom, which occurred in May 1974. This weekly cycle exhibited a symmetric structure and it had retested the seasonal low, which also held. At this point, all was still looking good for the bulls. From the May low the new weekly cycle began to move up.
The first warning came the week of June 21, 1974 (point C) when the market sold off creating a weekly swing and a potential top for the weekly cycle. The final warning came the week of July 12, 1974 (point D) when the weekly cycle violated the previous weekly cycle low. This final warning meant that the current weekly cycle had topped out and was then setup with left translation. Therefore, it was expected to decline for the remainder of its duration, as it indeed did. More importantly, the violation of the previous weekly cycle low confirmed that the seasonal cycle had topped out in only 3 months. At this point the market began a “waterfall” decline. Once the previous weekly cycle low was broken, the week of July 12, 1974, the market declined 27.74% as it moved into the 4-year low, which finally occurred in December 1974.
Note that at the bear market and 4-year low this large scale Dow theory bullish non-confirmation was still intact. The Industrials moved into the final bear market low the week of December 13, 1974 and in doing so violated the 1970 4-year cycle low. The Transports sold off into their 4-year cycle low the week of October 4, 1974. At that low the Transports had held above their 1970 4-year cycle low. This set up the large scale Dow theory bullish non-confirmation and the end of the 1966 to 1974 bear market.
It should now be obvious that cycles can indeed serve as a guide to keep you on the right side of the market. The importance of watching the seasonal cycle should also be imperative as this was the only tool that I know which warned of the imminent decline from the June weekly cycle top to the December 4-year cycle low in 1974.
Should we see the current rally fail, it should then retest both the March 2003 and the October 2002 lows. If the October lows are violated, we will then have confirmation that the seasonal cycle has topped. If this rally fails prior to May, I can offer you some price objectives for that decline. These objectives are also based on historical cyclical statistics. From my 4-year cycle study, I found that the average decline for all 4-year cycles that have topped out in 20 months or less has been 46%. A 46% decline will take the DJIA to about 6,330. If I look at the seasonal statistics I find that all seasonal cycles that have topped out in 6 months or less, declined an average of 27% from the seasonal top. A 27% decline from the December 2, 2002 top would take the DJIA to 6,600. If I look only at the seasonal cycles that have topped out in 6 months or less AND that have taken out the previous seasonal cycle low, the average decline is roughly 31%. A 31% decline would take the DJIA to about 6,240. These statistics tell me that if we see the October lows violated, we could likely see a break into the mid or lower 6,000 range as the seasonal cycle bottoms later this summer or fall.
Then we have the giant head and shoulders top, which can best be seen on the monthly S&P 500 above. This head and shoulders pattern gives me a minimum measured move of about 314 for the S&P 500. This is a much longer term objective for the bear market. I don’t look for these numbers before 2006. This is just another reminder of the “Big Picture.”
In Summary
My market forecasts are very simple. I look at the current cyclical structure of the market and then apply my cyclical statistics based on the historical quantification of the cycles. I then look at other supporting evidence such as 90% days, CI/NCI readings, sentiment, Dow theory confirmations or non-confirmations, new highs and new lows, oscillator readings, price/cycle confirmation, etc, etc. I then weigh the evidence.
As I see it today, I have to tip the scales to the bears as long as this market fails to continue higher into May or later. It appears that the evidence is strongly in favor of the bears. However, the bullish warnings above should be taken seriously. There is always a first time for everything. Also, keep in mind that just because the odds suggest a given outcome, don’t forget that events do come to pass that defy the odds.
It’s true that I have been expecting to see the October 2002 lows violated for sometime now and obviously it has not happened. This expectation has been based on the historical quantification of cycles. I hope that I have proven to you how this can be an extremely powerful tool. However, as it can happen, the market has managed to defy the odds. The most recent example of this was with the recent weekly cycle low holding above the October low in spite of the fact that it was setup with left translation.
Obviously, none of us have a way of knowing with certainty if the October 2002 lows are going to hold or not. However, I do have my cyclical statistics and the bottom line is this: The market has mustered up another rally as we now have the first weekly cycle low in place since the October 2002 seasonal cycle low. We should soon be seeing confirmation one way or the other. If this rally fails between now and May, without making new highs for this seasonal cycle advance, the statistics suggest a decline below the October low is very likely. Also, if this rally fails prior to May 1, 2003 the current weekly cycle will once again be set up with left translation. A left translated weekly cycle would just add to the probability of seeing the violation of the October low. Failure of this rally between now and April 30, 2003 could lead to a decline that should take the DJIA to at least the mid 6,000 range. The flip side of this coin is that if the market can manage to move higher into May, the picture will then turn somewhat bullish.
I sincerely hope that you see the rationale behind my bearishness. Based on the evidence at hand and until I see the market move into May, my forecast has to remain bearish simply because the facts support that argument. I realize that no method is perfect, but over time the consistency offered by cyclical analysis is indeed a very accurate market forecasting tool. This is the only method that I know which enables you to develop such expectations based on some type of quantification. In my view we simply must go with the probabilities and understand that sometimes the market will defy the odds. In the longer-term this defiance can’t continue.
A Few Comments
According to the cyclical picture that I see at hand, the March 12, 2003 low was nothing more than an intermediate term weekly cycle low. This appears to be confirmed with Peter Eliades’ CI/NCI readings as well. The lowest CI/NCI reading for the month of March came on March 10, 2003 at .9809. Historically, important long-term bottoms just aren’t formed with readings at this level, PERIOD! My strategy is to stay focused on the fact that we are in a major bear market; a bear market that is not likely to be over until at least 2006. At the end of this bear market, the S&P 500 will not be selling at a P/E of 32.00 as it is today. Do not get caught up in the emotion that you are missing the boat on the long side of this market. Trading the long side of a bear market is a very dangerous business. That would be like trading the short side of the recent 26-year bull market.
The opinions expressed in this newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.
