4-Year Cycles and Their Warning Signs
Is the current 4-year cycle stronger or weaker than the previous 4-year cycle? The following table compares the previous and current 4-year cycles shown in the charts below with the same percentage scales.
|Previous 4-year cycle from 10/8/98 to 10/10/02||Current 4-year cycle from 10/10/02 to Fall 2006|
|Peaked 57.8% above its October lowest weekly close.||Peaked 45.3% above its October lowest weekly close.|
|Peaked 76 weeks or 36.4% into the 4-year cycle.||Peaked 73 weeks or about 35% into the 4-year cycle.|
|Remaining 63.6% of the 4-year cycle was a decline that ended -22% below its starting level.||Remaining 65% of the 4-year cycle will likely be a decline that ends -22% to -50% below its starting level.|
Wave A down for the S&P 500 fell -50.5% in 930 days, and now its Wave B up has retraced 50.3% of its Wave A down in 55% of the time. Notice below how the previous 4-year cycle was a classic bear market cycle - peaking before the mid-point of the cycle and ending lower than its start. The current cycle peaked 3 weeks earlier and about 22% lower than the previous 4-year cycle, indicating that the current cycle is weaker and will be more bearish than the previous cycle. The last time there was a similar 4-year bear market cycle was 1970-74, which ended with an S&P P/E ratio of 7.6 in December 1974. The 1998-2002 cycle ended with an S&P P/E ratio of 30, and no multi-year bear market has ended with a P/E ratio above 10! Thus, this bear market is far from over, and the current 4-year cycle should lower this overvalued P/E ratio through lower prices. Richard Russell warns, "Let's say this bear market ends at 8 times S&P earnings, even if earnings hold at the current level -- which is extremely doubtful -- the S&P could lose two-thirds of its value."
Even though the S&P 500 has only retraced half of its Wave A decline, the recent investor bullishness has broken the previous bullish records at the tops in 2000 and 1987 by almost 2 times! This is another sign that Wave C down is close to starting its multi-month decline into the Fall of 2006 because most investors are not expecting a major decline, just like most were not expecting in early 2000 for S&P 500 to fall in half and Nasdaq to fall -78%!
Also notice that the 4-year moving average turned down in mid-2002, which was the first time since 1978. Since it is still pointing down and the S&P 500 has not risen significantly above it, the 4-year cycles are still bearish. Plus the current 8-year cycle will also bottom in the Fall 2006, which will create greater selling pressure as the 4-year and 8-year cycles bottom together. After all, Wave C down is known for its relentlessly falling prices and has always fallen more than its previous Wave A down in multi-year bear markets. If Wave C down is also 930 days long, then it might end around 9/21/06. This is an interesting date because it is near the fall equinox, and Wave A down started within a few days of the spring equinox in March 2000. I do not know why this bear market might start and end near equinoxes, nor why SPX makes major turns at its 50% marks, nor why the Dow's Wave A was exactly 1000 days, but they are amazing patterns that are developing. Who could even cause such patterns to occur?
As I have argued that we will see deflating asset prices and inflating commodity prices, Dan Denning gives a good explanation of why: "What I think is going to happen is that prices on anything that is backed by debt are going to go down. That's what a debt-deflation is all about. Houses, stocks, corporate bonds... and trillions of dollars worth of debt-backed derivatives - are going to fall. They've been bid up by debt, not by genuine yields or purchasing power. And now they're bound to become cheaper as the debt behind them is marked down and withdrawn. On the other hand, the prices of primary materials - gold, oil, platinum, copper, commodities of all sorts - are going up. Because they are not backed by debt. Instead, they are bought up, in competitive markets, all over the world. As the dollar goes down, the price - in dollars - goes up. Demand will go down, somewhat, as Americans pull in their belts. But there is a huge new demand coming from Asia." The Economist magazine forecasts a 20% drop in real estate prices as interest rates rise, which would be the "first global property bust in history." It might also be the biggest financial bust in history because property is a bigger business than stocks and is leveraged with much more debt. While there are about $30 trillion worth of stocks in the world, the property market is estimated at about $50 trillion. The Economist magazine also reports that their Commodity Price Index in the last year is up 32.8%. Food is up 27.3%. Non-food Agriculturals are up 22.6%. All Industrials are up 40.9%. Oil is up 22.6%. Metals are up 58.5%. Gold is up 29.3%. How can every commodity be up between 22% and 58% in the last 12 months, and Greenspan claim that inflation is low, is beyond reasoning!
However, in a recent article, Robert Prechter compares today to the 1830s when commodities rallied for a while but then deflated with deflating assets of stocks, bonds, and real estate. I agree that the potential for this trend exists, but not at this time as he suggests. I still think that Wave 5 up in gold and gold stocks into August may complete the top of commodity prices that he discusses. A rise above $431 gold and HUI 259 will confirm that Wave 5 up is in progress to $475-$500 gold and HUI 360. But we will need to sell all gold positions at the top in August and see if deflation sets in with commodities or not. It depends on what the US dollar does when it hits 80 and China's economy. Because China is growing so fast, it has created a large demand for commodities, driving prices higher. If China's bubble pops along with our US bubble, then this demand could fall quickly and drive commodity prices down. Plus, the dollar could rally for several months after hitting 80, causing gold to decline for several months. But if the dollar plunges below 80, then gold would rise sharply. So be cautious when we see these critical levels.
The bottom line is that huge asset and debt bubbles have been created by years of easy credit and excessive money supply. Rising interest rates will likely pop these asset and debt bubbles. I still think that Greenspan will go down in the history books as creating the greatest global economic fiasco in world history. His nickname should be "John Law" Greenspan after the man who did the same thing to France in the early 1700s. Robert Prechter writes, "The fall-off is significant because it shows that the public is losing its connection to a term "millionaire" that dates back to 1720 and John Law's creation of modern finance near the last Grand Supercycle peak. According to the book Millionaire, it was first used to describe the wealthy beneficiaries of the Mississippi Company: "Law sparked the world's first major stock-market boom, in which so many made such vast fortunes that the word 'millionaire' was coined to describe them. The term 'millionaire' exerted a seductive appeal. The idea that money could be made from speculation rather than drudgery was printed indelibly on the popular consciousness." The counterbalancing principle, that money could go up in smoke even faster, was made just as indelible by the subsequent bursting of Law's bubble. But the public is unable to keep both ideas in mind at the same time. So, it vacillates between the two, and every 300 years or so it repeats the transition in a fashion that is so uniform and grand that, for those few observers that are able to watch it happen in real time, it is a wonder to behold." To learn more about John Law's economic fiasco, read http://www.safehaven.com/article-1424.htm
The stock, bond, dollar, and gold charts seem to be warning that a second top in the stock market will occur in the next 2 weeks, and then the Fed will have a rate hike on May 4 or this summer causing a large sell-off in stocks, bonds, and the US dollar. Gold should start rising to new highs because of inflation fears as supported by the rapidly rising commodity prices. Gold stocks could sell-off in the first week of May and then start their next wave up to new highs. So May could become very volatile. Now is the time to sell any stock and/or bond mutual funds, and take a look at bear funds, commodity funds, and gold stocks/funds.