Terrorism, Fear Increase as 8-year Cycle Bottom Nears
The year 2006 to date has been a year marked by extreme apathy, to say nothing of extreme fear. In the early part of the year we saw apathy as the S&P 500 index slowly drifted its way to higher highs but in a most unemphatic fashion. This was accompanied by a persistent bullish sentiment among investors yet the commitment was obviously lacking.
Then came the top -- April for the NASDAQ and May for the rest of the market -- as the final "hard down" phase of the 4-year/8-year cycle got underway. After a sharp drop followed by several weeks of basing we're now only days away from the end of the latest 4-year/8-year cycle. For most it can't come soon enough as the cycle has not only brought negative financial returns but also a persistent apathy and since June it has increased feelings of pessimism and fear as measured by the headlines and sentiment numbers.
Since June we've been a persistent slump in investor sentiment as worries have grown over things as varied as terrorism, recession, the Middle East, oil and gas, and a variety of other threats both real and potential. This constant worry has even been reflected in the investor sentiment polls, notably the one released weekly by AAII. Bearish investor sentiment has outranked bullish sentiment for weeks on end now, even though we are more than two months removed from the June lows in the S&P.
Even foreign countries are feeling the malaise of pessimism that normally accompanies the 4-year/8-year cycle bottom A German economic sentiment poll released on Tuesday, Aug. 22, "unexpectedly slumped to a five-year low, indicating nervousness from institutional investors and analysts that accelerating growth in Europe's top economy may be a one-time affair," according to CBS MarketWatch. There you have it -- investors are even worried over growth and expansion!
Here is a smattering of recent headlines from the financial press that reflect the latent fear that investors are feeling this summer along with concern over possible terrorist attacks:
"Stocks and oil suffer heavy selling on renewed terror plot concerns"
"Shares in carriers hit by fears of fall in traffic"
"Pessimism sparks dash for cash"
"Growth concerns spur bonds revival"
"Kurds recount gas attack horrors"
This just in from the MSN news wire, the granddaddy of all the latest fear mongering headlines: "Grim warning from hurricane chief: 'Megadisaster' worse than Katrina will hit U.S. someday."
In addition to all the above we have the constant growth in bomb-related headlines making their way across the daily news wires. Here is a collection of headlines concerning various bomb scares from just the past five days:
"Bomb scare on Sydney bound flight"
"Bomb scare in midtown Tucson"
"Bomb scare in Upper Valley (Hartford, VT)"
"Bomb scare shuts down city center (Adelaide, Australia)"
"6 trains halted in liquid bomb scare (New York)"
"Terrorism fears mount after German bomb scare"
"Box causes bomb scare in San Andreas"
"Empty suitcase in Davenport (Iowa) shuts down bridge, prompts bomb search"
These headlines show that people everywhere are so paralyzed with fear over the recent spate of global bombings that even empty boxes and suitcases on roadsides are creating major panic. If the intent is to create widespread fear using artificial bomb threats the criminal element has certainly succeeded. The question becomes one of organization: is it an orchestrated campaign or merely a random collection of separate incidents. We'll leave off examing this for another day.
A reader from Germany who specializes in wave trading sent me the following e-mail in which he makes a very good point concerning the 4-year cycle. He writes:
"...I've found that sometimes the 'invisible hand' forms the structure of the waves in such a way to hit upon the main cycle in the future in 'as good a way as possible...a planned way'. Now we have the 4-year cycle at the door and every cycle-man knows that. Every investment bank and the Fed, too. Right?" He then asks if maybe the 4-year cycle bottom isn't already behind us instead of during the time period when everyone expects it to bottom between September-November.
This gentleman has brought up a very good point regarding the possibility that the 4-year cycle has bottomed already. He touched on this in his e-mail when he pointed out that whenever too many people are expecting the market to do something on either the upside or the downside it usually never happens, at least not in the way everyone expects. And while a significant price low in the market from the June-July double bottom has likely been seen, there is a distinction between a bottom in price and a bottom in time. Time cycles are fixed so it's hard for me to accept that the 4-year cycle itself has been somehow "cut short" but there can be bottoms in terms of price before the bottom in time occurs.
There's still the matter of the time cycle bottom, which is scheduled for around Labor Day. With the market as currently "overbought" as it now is and with Federal Reserve securities lending volumes so low, we'll likely remain below the May high and within the recent trading range for a while longer until the 4-year cycle formally bottoms in less than two weeks. In any case it's good to know that the cycle-related apathy and morass the market has been subjected to this year from the descent of the 4-year/8-year cycle should soon be coming to an end.
We've made an ongoing observation since last year that whenever a major market bottom is forming there always seems to be a handful of critical "name" stocks (mostly tech stocks) that get hammered in quick fashion. We call this "internal rotation" for it allows the broad market to escape serious punishment at the expense of a few key stocks. In the "old days" the broad market averages such as the Dow would normally take a huge hit whenever any of the major longer-term cycles were bottoming. In recent years this hasn't always been the case. Instead, we find a few big name stocks getting punished so that the broad market doesn't have to suffer in an extended fashion. Last year's victims included Amazon (AMZN) and Google (GOOG). As we talked about a few weeks ago, this time around it was Yahoo (YHOO) and again AMZN, both of which took big hits in late July. AMZN fell from its July high of $38 to its August low of $26. YHOO dropped from $33 down to $25 in only a couple of days.
Since then both stocks have recovered nicely with YHOO already filling in much of the downside gap created from the July mini-crash. AMZN is basing and trying to confirm a bottom. This process of "internal rotation" is something the insiders have evidently discovered as a reliable technique for taking the pressure off the broad market during the "hard down" phase of a major cycle. Our friend from Germany made allowance for this in his above statements and this is likely one major way the "invisible hand" as he calls it manages to steer around the cycles.
A few weeks ago we pointed out that while the tech sector has had a rough go of it this year and has clearly born the brunt of the "hard down" phase of the 4-year cycle, the bottom has most likely been seen for this sector and a turnaround of equally impressive proportions should be underway by the fourth quarter. We asked, "Can the tech sector bottom before the yearly cycles? Yes, for this happened at the last yearly cycle bottom in 2004 (when the 10-year cycle bottomed in October) and the NASDAQ that year put in its final low for the year in August." As pointed out then, we may be witnessing something similar in the current tech market as a number of positive divergences show up in many charts, including the semiconductors, biotechs, and even nanotechs.
Mining Stock Notes
Take some profits on Kinross (KGC), which was noted in our July 27 commentary as being a rally candidate and has since rallied $3 to a new high for the year just below the $14.00 level on Wednesday. KGC is currently "overbought" and is due a correction soon.
ECU Silver Mining (ECU:TSXV, $2.87) has been trading in a lateral consolidation pattern since its rally peak back in April. The boundaries of this trading range are between $2.00 at the bottom and approximately $3.25 at the top with ECU currently heading toward the upper boundary of its trading range. The company has released one positive result after another in recent weeks and months and for that reason I view this trading range as consolidation within a longer-term bull market. In other words, the next major directional move for ECU is likely to be up. Watch the trading range ceiling at $3.25 for the next breakout signal, which could come after the 4-year/8-year cycle bottoms in September.