The 4-year Cycle that Refuses To Be
Both the Industrials and the Transports pushed into all time new territory this week. As a result it is indisputable that the advance is still alive. But, I still do not believe that the advance is well. Given the relentless resilience of the market, there are times that even I question the data surrounding the 4-year cycle. However, when I remove the emotion and simply look at the raw data it continues to suggest that there is still an unwinding into the 4-year cycle low somewhere ahead.
I know and totally understand how some may ask how I can continue looking for a 4-year cycle low ahead. I can promise you that I would love nothing more than to be able to say that the data suggested that the 4-year cycle low had already occurred and that the market was moving up with a brand new advancing cycle with low risk. This would certainly make my job much easier because people can clearly see the advance, but they can't see the ongoing data that continues to show the risk of a looming 4-year cycle decline and I do understand that. I can assure you that I am not being hard headed, stubborn or trying to make some grand call. I'm simply looking at data and it is clear. As of this time, nothing indicates that a 4-year cycle low has been made. Rather, this data suggests that we continue to see an extended advance into the ongoing and now late 4-year cycle top.
One such piece of data that I will share with you here is my Intermediate-Term Advance-Decline line. This indicator expands as the market moves up out of the 4-year cycle lows and contracts as it moves into the 4-year cycle tops. This indicator is not a market timing indicator in the sense that it provides specific buy and sell signals, as those signals are generated from other indicators. The Intermediate-Term Advance-Decline line can be used to confirm the evolution of the 4-year cycle as it moves from low to high. First, look at the 4-year cycle lows in the chart below.
Note how this indicator expanded, as price moved up and out of each of the 4-year cycle lows. Also note that as the advance into the 4-year cycle matured, this indicator began contracting and typically such contraction has run about two years. In the current case look at how this indicator made 3 divergent peaks between 2004 and 2006, with the last peak in May 2006 leading to the decline into the June/July lows last summer. As I'm sure you are all aware, many are proclaiming the June/July lows as having been the 4-year cycle low. While I understand that, as you all know I have been telling you that the statistical data just does not support such opinion. Now, if we look at the behavior of this indicator we find that from its May 2006 high it moved lower along with the market into it's July low. From that low this indicator moved up for one month, which fell short of the May 2006 peak. Furthermore, a one month advance hardly qualifies as an expansion, especially given the collapse that has since followed. This is clearly not the kind of behavior that has been seen in the wake of previous 4-year cycle lows.
So, the point here is that this indicator is clearly telling us that the June/July lows last summer did not mark the 4-year cycle low, which is consistent with what the statistics have been saying all along. This contraction tells us that the quality of this rally is suspect and that there still appears to be a derailing of the market coming with the decline into the 4-year cycle low, which should still be somewhere ahead of us. Between this indicator and the detailed statistical data surrounding the 4-year cycle, we are clearly in a risky environment. Yet, the market continues to grind higher. Some may say that this is because of manipulation. Others will argue that cycles, Dow theory and market indicators are no longer valid because we are now in a new paradigm.
I both agree and disagree with these comments. Sure, we are no doubt in a new paradigm in the sense of the massive and ongoing liquidity campaign to inflate, inflate, inflate, which is all in an effort that is geared at saving the stock market. But, I do not agree that cycles or the Dow theory are no longer applicable or relative. What appears to be happening is that the massive infusion of liquidity has stretched and skewed many of the normal market relationships. But, at the same time, nothing has occurred or changed the statistical data surrounding the 4-year cycle to indicate that this low has occurred. Without getting into the specifics, I have over a dozen specific statistical-based "DNA markers" that have consistently occurred at every 4-year cycle low since 1896. To date, none of these marks have occurred telling us that the 4-year cycle low has been seen. In fact, none of the DNA markers that have historically occurred in conjunction with any of the previous 4-year cycle tops has occurred either. In my opinion it is not sound thinking to conclude that something that has occurred in association with all 27 of the previous 4-year cycles over the past 110 years is suddenly no longer applicable. Rather, it is my belief that the more logical explanation is that the obvious liquidity infusion has been and continues to be the major factor responsible for stretching these norms. Think about something for a minute. If the risk of a decline into the 4-year cycle low and the aftermath that such decline could trigger wasn't real, do you think we would be seeing such drastic measures to keep the market afloat? No, I can guarantee you that the market risk is high and "the boys" know it. Thus far, the liquidity infusion efforts have held back the tidal forces of the 4-year cycle and as a result this cycle has once again been extended. But, I do not think that "the boys" can stop the natural and inevitable downturn into the 4-year cycle low. I think that in the end it will only make matters worse. However, for now it does appear that this 4-year cycle is being extended.
I tell my subscribers that the most important indicator we have is the intermediate-term Cycle Turn Indicator and that everything else is secondary. When I say everything else, I mean the Dow theory, the cyclical phasing and even the statistical data. The reason being, is that Dow theory, the cyclical phasing and the statistical data tell us what "should be" expected over the horizon. Also, all of these things can evolve, morph, drag on and stretch. But, the intermediate-term Cycle Turn Indicator tells us "what is" rather than what "should be." Plus, the intermediate-term Cycle Turn Indicator has been proven right time and time and time again. As a recent example, this indicator turned up on the Transports back in December prior to their move up that confirmed the Industrials in February. The most recent example of this indicator's accuracy came with its upturn on the Industrials that occurred the week of March 23, 2007 and which remains positive today. Thus, this leaves us with opposing forces in the market place. On one hand we have the statistical data that continues to tell us the 4-year cycle low has without a doubt not occurred and that it is still ahead of us. In the meantime, we also have a positive intermediate-term Cycle Turn Indicator and until it turns back down higher prices remain possible. All in all, this tells us that the market continues to stretch the norms as it presses yet higher into what 110 years of market statistics tell us should be a 4-year cycle top.
Should you be interested in analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator as well as coverage on the Dow theory, other price quantification methods and all the statistical data surrounding the 4-year cycle, then please visit www.cyclesman.com for more details. A subscription includes access to the monthly issues of Cycles News & Views covering the stock market, the dollar, bonds and gold. I also cover other areas of interest at important turn points such as gasoline, oil, silver, the XAU and recently I have even covered corn. I also provide updates 3 times a week plus additional weekend updates on the Cycle Turn Indicator on most all areas of concern. I also give specific expectations for turn points of the short, intermediate and longer-term cycles based on historical quantification.