THE GURU'S CORNER Catching the next cycle Commentary: Stocks headed lower but bullish long term E-mail | Print | RSS Feed | Disable live quotes By Bill Meridian, Cycles Research Last Update: 1:18 PM ET Jun 12, 2006
VIENNA (CR) -- The U.S. stock market will likely begin a short-term rally in the coming week due to the expiration of two time cycles and a completed down wave. This will only be a retracement rally in an ongoing decline, so investors should use the opportunity to reduce remaining holdings. The Dow Jones Industrial Average (INDU : Dow Jones Industrial Average News , chart, profile, more Last: 10,792.58-99.34-0.91% 4:30pm 06/12/2006 Delayed quote data Add to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: INDU10,792.58, -99.34, -0.9% ) will likely complete a correction at 10,645, about 100 points below Friday's low. This would finish an A-B-C pattern to the downside. The Dow will then be touching an exponential 21-day moving average envelope, a buy signal. In addition, the Dow will be at a 50% retracement of the entire October 2004-May 2006 upmove. This is also the 62% retracement of the October 2005-May 2006 rally. The same observations can be made for the Standard & Poor's 500 Index (SPX : S&P 500 Index News , chart, profile, more Last: 1,236.40-15.90-1.27% 1:09am 06/13/2006 Delayed quote data Add to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: SPX1,236.40, -15.90, -1.3% ) and the Nasdaq Composite (COMP : Nasdaq Composite Index News , chart, profile, more Last: 2,091.32-43.74-2.05% 12:19am 06/13/2006 Delayed quote data Add to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: COMP2,091.32, -43.74, -2.0% ) . The yoyo indicator, developed by Arms, measures the amount of volume required to lift the market by one point. A low reading is bullish; a high reading is indicative of tired market unable to propel price any higher. It hit a high on May 4, one day off of the Dow's high and is currently at its lowest reading since the October 2005 low. The same index for the Nasdaq is currently at its lowest reading since October 2004. This is indicative on an impending low and a sign for traders to go long. The oil outlook Oil broke out from a triangle formation, projecting an $80 per barrel price. The $67-$68 support level is likely to hold. This objective is likely to be achieved in late June or in July; a $68-$73 trading range is likely in the interim. The table below of past cycles is helpful in anticipating oil trends. For example, oil prices have risen from Feb. 24 to May 17 on 16 of 22 occasions or 73% of the time. The average move has been 6%. The expected return is the product of these two numbers, or .73 times 6% equals 4.38%. This is a convenient way to rank the performance of the time periods. Bullish cycle No. up Total up move Exp. Ret. Date 1 Date 2 Days 16 22 73% 6% 4.38% 24-Feb 17-May 82 17 22 77% 12% 9.27% 25-Jul 14-Oct 81 14 22 64% 5% 3.18% 11-Dec 17-Jan 37
Bearish cycle No. up Total up move Exp. Ret. Date 1 Date 2 Days 17 22 77% -11% -8.50% 15-Oct 11-Dec 57 15 22 68% -3% -2.05% 16-May 19-Jun 34
Much of the oil price rise is due to currency depreciation. Since 1980, money supply, or M2, has increased by about 4.3 times. The prices of real estate, housing, stocks, etc. have increased since 1980 by varying percentages. Much of this increase was simply fueled by the rise in the money supply, the traditional Austrian definition of inflation. However, the price of oil and many commodities fell for about 20 years. If the oil were to simply rise with the money supply, then it would have to increase about 4.3 times its early 1980s price of about $25-$30 per barrel. This suggests a longer-term target of over $100 per barrel. Having spent 14 years in the Gulf, I can also add a fundamental perspective. It is not easy to bring new production on line to meet surging demand. According to Legg Mason, if we apply a standard s-curve of economic growth to the coastal area of China and all of Indonesia, then oil demand from this area will create a need for two extra Saudi Arabias every day. This projection assumes that per capita oil consumption in these countries will roughly follow that of Japan at the same phase of their growth cycle. The price rise is also reflecting this situation. Longer-term cycles suggest a downturn in both the commodities and equity markets from late August into the autumn. I recommend that equity portfolios move to cash in the second half of August. Commodity portfolios are advised to substantially reduce longs and move to the short side. The cycles suggest that this decline will be accompanied by some event on the scale of the 1980 Hunt Brothers sliver corner collapse, the 1994 Mexican revaluation, or the 1998 ruble-baht difficulties and the Long Term Capital Management collapse. Bill Sarubbi, a.k.a. Bill Meridian, edits Cycles Research, which projects past cycles and phases into the future. Bill has been studying market cycles since 1972 and is well known for his study of the effect of the lunar cycle on stocks. (billmeridian.com) Content found in The Guru's Corner is subject to the terms and conditions found in the Disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions. (disclaimer) End of Story
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