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Nadeem
Veteran Investor
Joined: 11 Jul 2004
Posts: 639
Cash Points ££ 13955.74
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 Posted: Sun Jan 21, 2007 10:38 pm Post subject: Stock Market Cycles Analysis - The Trend is still up |
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Let me begin by explaining that in my work with the markets there are really two distinctly separate pieces. First, is what I call the "over the horizon" piece. This work utilizes the Dow theory, cycles and statistical trend quantifications, all to develop probabilities as to what likely lies ahead or "over the horizon" for a given market. The second piece of my work is primarily centered around my Cycle Turn Indicator. This indicator provides us with confirmation at important turn points. So, it tells us what we should expect now and in the immediate future. All the while, I am constantly watching and monitoring the longer-term "over the horizon" work as well. Sometimes, the intermediate-term work can evolve and change the longer-term forecasts, while other times it may confirm the longer-term forecast. So, this is an act of working two ends to the middle.
At present and contrary to popular opinion, the long-term work continues to suggest that the 4-year cycle low is still ahead of us. I know that most people are of the opinion that the 4-year cycle low occurred at the June/July 2006 lows. Those that were looking for the 4-year cycle low last October are all pretty much now also in the camp that the 4-year cycle low occurred at the June/July 2006 lows. But, my long-term "over the horizon" data originally told me back in January 2006 that the 4-year cycle low would not occur in the summer of 2006 or the fall of 2006. For over a year now this long-term work has been pointing into 2007 for the 4-year cycle low. I will admit that it originally suggested that the decline would begin in late 2006.
However, once we got into the fall of 2006 the intermediate-term work actually pointed to higher prices before the 4-year cycle top was made. This forecast is strictly based on statistical and trend quantification data and remains intact and on track today. With the markets I will admit that anything is possible so there is a chance that the low occurred in the summer, but the statistical data does not in any way support such an occurrence. Furthermore, the price action that has lead up into the current highs has actually been supported by these same statistical probabilities that surfaced in the fall and has not affected the longer-term expectations surrounding the ongoing setup of the current 4-year cycle.
That being said, I want to take a quick look at Dow theory. Let me begin by saying that according to Dow theory, the trend is still positive. But, at the same time the ongoing non-confirmation between the Industrials and the Transports continues to warn of an approaching top. I have marked the current non-confirmation in green on the chart below. Understand that cycles are not a part of Dow theory. But, history does in fact tell us that 81% of all 4-year cycle tops have historically occurred in conjunction with a Dow theory non-confirmation. The last two such non-confirmations occurred at the 1998 4-year cycle top as well as the 4-year cycle top that occurred in 2000. Non-confirmations are not buy or sell signals. Non-confirmations do however serve to telegraph that a change is likely in the making and to be careful. Until this non-confirmation is corrected, it must be respected.
In spite of the Dow theory non-confirmation and the statistical quantifications surrounding the 4-year cycle, which are not discussed here, the public remains very bullish and completely oblivious to the current market risk. One measure of this sentiment comes from the Investor Intelligence data. Below is a weekly chart of the Industrials along with the weekly Investor Intelligence readings in the upper window. We have just completed the 222nd consecutive week with this reading either at or above the 50% level. When this indicator is at the 50% level it means that there are just as many bulls as there are bears. When this indicator is at 75% it is telling us that there are 3 times as many bulls as there are bears. The point here is that optimism among investors ebb and flow with market cycles. For example, since the inception of the Investors Intelligence data every 4-year cycle low has occurred with extreme pessimism. All the while, 4-year cycle tops are made with extreme bullishness and optimism. So, it is a fact that most people are the most bullish at or near a top and that most people are the most bearish at or near a bottom.
Please understand that just as with non-confirmations sentiment data does not yield buy and sell signals, but rather serve as an indication of the overall environment. Let me also add that since the inception of the Investors Intelligence data back in the 1960's there has never been a period of such persistent bullishness. Even during the bull market of the 1990's and into the 2000 top this level of consistent bullishness was not seen. At 222 consecutive weeks at 50% or more we are indeed at record bullishness. What this amounts to is that this entire 4-year cycle advance has occurred with the plurality of bulls over bears and that has never occurred before.
Full article - http://www.marketoracle.co.uk/Article241.html |
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