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[Icy]

The Power of the 10-Year Cycle

Here we are approaching another 10-year cycle peak.  The last such peak was in 1999, while the most recent 10-year cycle bottom was in 2004.  We wrote extensively on both episodes at the time and the 10-year cycle is one of our favorites.  It is what I like to call the ?slam dunk? cycle since among all the yearly Kress cycles, the 10-year cycle at its peak and bottom phase can almost always be used for profitable trading/investing.  It will be sad to wave goodbye to our friend, the 10-year cycle, in a few weeks.  After the 10-year cycle peaks it will be up to the 6-year cycle to provide any longer-term support between now and 2012 when the final ?hard down? phase of the Kress 120-year Grand Super Cycle begins.  In this commentary, we will focus on the remaining portion of the 10-year cycle and how it can be used to good effect by investors between now and year-end.  That the broad market has benefited from the peaking 10-year cycle is obvious and needs no elucidation.  However, clarification is needed within the scope of the Kress cycles to tell us what to expect from the market from now until year?s end based on cyclical comparisons.

The year 1979 is the closest parallel to 2009.  The 6-year cycle bottomed in 1978, which meant the stock market had the benefit of a newly rising 6-year cycle in 1979.  The 10-year cycle peaked in the early part of October in 1979.  This becomes apparent in the daily chart of the S&P 500 Index (SPX) shown below.

The 10-year cycle peaking in October 1979 triggered a sharp decline that saw the SPX retrace much of its gains from the prior four months.  Most of this sharp decline took place within the short time span of three weeks, which is typical of a major cycle peaking.  Following the October mini-crash, the S&P rallied through November and December and almost recovered its losses from October and closed just under the high for the year 1979.  The NASDAQ Composite Index actually had a much stronger recovery following the 10-year cycle peak in October 1979 as shown in the next chart.

By comparison, the most recent 6-year cycle bottomed last year, which means the newly formed 6-year cycle is up in 2009.  This ascending 6-year cycle has combined with the forceful momentum of the peaking 10-year cycle to create one of the strongest recovery rallies in decades in percentage terms.

The next cyclical parallel to our time takes us back to 1948-1949.  This was the other time in the current 120-year cycle that the 6-year cycle bottomed in the eighth year of the decade (1948) while the 10-year cycle peaked in late 1949.  Even more significantly, 1949 is analogous to 2009 in that it was five years from the 60-year cycle bottom of 1954.  This year is also five years from the 60-year cycle bottom of 2014 with the 60-year cycle the half-cycle components of the 120-year Grand Super Cycle.

So how did 1949 end up for the stock market?  While the first half of the year was down, the latter half of the year was up steadily with the market making a high for the year in December ending on a positive note.

The prior occurrence of the 6-year/10-year cycle configuration was in 1918-1919.  The year leading into 1918 was not only the final ?hard down? phase of the 6-year cycle but also of the more important 24-year cycle, which also bottomed in 1918.  The Panic of 1917 was the result; its modern day parallel is the credit crisis of 2007-2008.  The 6-year cycle bottomed in 1918, which effectively ended the panic, while the 10-year cycle peaked in 1919.  The year 1919 saw a tremendous rally in the stock market, culminating in the highest level for stocks in the century to date.  The 10-year cycle peaked late in the year 1919, as per normal, producing a correction but still enabling stocks to close with a gain for the year.

The year that comes closest of all to approximating our time is 1888-1889.  This is the historical period exactly in alignment to where we stand in the 120-year cycle.  For in 1889 ? much like 2009 ? the market was five years away from both the 60-year and 120-year cycle bottoming.  The 10-year cycle peaked in 1889 while the 6-year cycle had bottomed the previous year.  Therefore, the 6-year/10-year cycle configuration was identical to ours within the same context in the last 120-year cycle.  The year 1889 was a gainer year for stocks as reflected by the Axe-Houghton Industrial Stock Price Average.  According to this index, stocks made their highs for the year near the end of 1889.

In the preceding overview we have looked at only those years in the 120-year cycle when the 10-year cycle peaked (which always occurs in the ninth year of the decade) and where the 6-year cycle bottomed the previous year, much like the 2008-2009 experience.  If we look at the most recent 10-year cycle peaks of the last 30 years regardless of where the 6-year cycle was headed, we find that the years 1989 and 1999 were both similar in that the 10-year cycle peak produced a discernable decline in the stock market, but the market bounced back strongly in the final two months of the year.  The reason for this is that while the 10-year cycle may have peaked around late September/early October in most of those years, the residual upside momentum from that cycle still carried over into year-end.

 

Also, in most years when the 10-year cycle peaks one or more of the dominant weekly Kress cycles tends to bottom shortly after the 10-year cycle peaks, creating a strong tendency for the stock market to bounce off the decline created by the 10-year cycle peak.  As history clearly shows, the stock market tends to close at or very near its high for the year in most 10-year cycle peak years.  The implication is for stocks to enjoy a strong fourth quarter this year in spite of widespread fears of another bear market to begin.

More importantly for our present discussion is the state of the economy in light of the peaking 10-year cycle.  The S&P 500 bottomed nearly six months ago, thus ending a 2-year-plus bear market.  The old bromide about the stock market preceding turns in the economy by 6 to 9 months has consistently held true and this time should prove to be no exception.  The upward bias created by the 10-year cycle peak this year is pointing to improved business conditions and is one reason for expecting the economy to outperform the consensus in the fourth quarter.

To get a lead on the interim direction of the economy, we use the New Economy Index (NEI) to track the state of the retail economy.  The most sensitive retail stocks (bricks and mortar, transportation and Internet) are averaged to provide the weekly reading in the NEI, which points to the direction the economy is headed.  Using the important 12-week and 20-week moving averages, we have a strong indication that the economy will show improvement between now and year-end, and the economic numbers should start reflecting this improvement by the end of the fourth quarter.

The 10-year cycle told us to expect a strong recovery in 2009 and to date it has performed according to the historical script.  The analysis of prior 10-year cycle peaks also gives us reason for an overall positive performance in the fourth quarter, notwithstanding the bumpiness that is always felt by the actual peaking of the 10-year cycle near the end of the third quarter.

[Icy]

Same Tools ? Different Thoughts

I have made my mark in trading and trading education by thinking differently. One of the things I have always been fascinated with is how we are taught to do certain things and how we learn, specifically when it comes to anything that has to do with competing. For example in the United States, we compete for jobs, money, better this and better that? Have you ever considered that in the largest democracy in history, our school systems do not teach classes on how to compete? In capitalism, there is typically a winner and a loser. Yet, people in this country are never taught in school how to compete. In fact, it is the opposite. The natural educational path of our school systems is to train everyone to think the same way. This is bad news for those with those herd mentality blinders on and great news for those who focus on the art of competition. It all begins with thinking differently. If you bring a herd mentality mindset to competing in the trading markets, you will likely hand your account over to those who think differently and think the markets properly.

The books that teach conventional technical analysis tend to teach it the same way ? offering little to no edge. Be careful taking the same action the masses do in the markets because they are not the ones who consistently profit, they typically lose. Let's take a look at two ways to use these same conventional principles a bit differently than conventional thought.

Trend Analysis

Most people know all about assessing a trend. Typically, everyone looks to see if the market in question is making higher highs and higher lows for up trends or lower highs and lower lows for down trends. Others use moving averages to determine whether they are sloping up for up trends or down for down trends. These are the two most popular ways to assess a market's trend. Another way to assess a trend is to look at the pivot lows in up trends and pivot highs in down trends.

Let's take an up trend for our example. Looking back at recent prior data in any market on a price chart, it is easy to see what the current trend is. It is equally important to assess how healthy the trend is and when and where it may end. One way to do this is to measure the distance between the lows of the pivots that make up the up-trend. Notice the up trend in the chart below; the distance between the pullbacks (pivot lows) is decreasing as the trend moves higher. This means the trend is becoming weak and will likely end soon.

The logic behind this is that a strong trending market does not pullback often. If it does, it is not a strong trending market anymore. Keeping with our constant supply and demand theme, remember that a trend on any timeframe is really a supply and demand imbalance moving back into a price level of temporary balance. This is a larger timeframe chart but the assessment can be done in any market, and any timeframe.