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History Counts

Mar 11, 2014 8:56 am Print Print

You've heard me say many times that every 40 years something bad happens in the market and the economy and that every other 40 years something really bad happens.
Last year, I assumed this pointed to a false breakout in January like 1973. However, the explosion in January 2013 looks like an effect of the 5-and-10-year cycles clustering in the fall of 2012. The 10-year cycle tied to the 2002 low while the 5-year cycle tied to the 2007 top for a low-to-high-to-low cycle.
Instead of a false breakout like 1973, January 2013 was a kickoff. The market was talking and ran, literally wire-to-wire.
So, where is the 40-year cycle, and when will it exert its influence?
When looking at cycles, it is important to remember that the market is not a fine Swiss watch. Cycles are elliptical rather than perfectly circular.
But the 40-year cycle has a long history. The stock market had important bottoms in 1861 (Civil War), 1903 (Rich Man's Panic), 1942 (WWII), and 1982 (Cold War climax).
While there were obviously other absolute bottoms along the way, what is important about these bottoms associated with the 40-year cycle is that the above cycle bottoms were ones the market went UP from.
October 1972 defined a pivot low from which the DJIA exploded around 13% into December, followed by a shakeout and final spike high in January.
1972-1973 DJIA Chart:

The final spike high was just shy of 2% higher than the prior December peak.
From the October 2013 low, the SPX ran up around 13% into late December January's shakeout has been followed by a new high around 2% above the prior peak.
Is it possible that the 40-year cycle saw a "right translation" of one year? In the big picture, arguably is plus-or-minus one year a viable consideration?
What is interesting is that 41 aligns with March 6 on the Square of 9 Wheel.
This is playing out at the same time, a 60 to 61 month low-to-high cycle may be playing out mirroring the moves from 1994 to 2000 and from 2002 to 2007.
This may be playing out at the same time that the SPX has kissed the upper rail of a channel paralleling major bottoms over the last 40 years that ties to the 2000 top.
Long-term SPX Chart:

Yesterday, I heard a money manager on TV say that it didn't matter where the market had been, that it didn't matter that the SPX was up 30% in 2013. It only matters where it's going from here.
There is some truth to that, but we are not playing pure ice hockey here. History matters. It isn't JUST about where the puck is going. In the market, it's about where it's been. History counts. Literally.
In the market, perceptions are made over long periods of time and, to a large extent, may be based on prior behavior and what happens when sentiment reaches levels over an extended period and when valuations become elevated for extended periods. The key word being extended. Sentiment and valuations can remain exalted over TIME. The absence of a reaction to lofty sentiment and valuations is not an indication that they will never matter, despite the fact that time and persistency have a way of underpinning the notion that this time is different.
So, does it matter that the S&P 500 has tagged a major rising trendline? Are these arbitrary lines, or as W.D. Gann stated, does "God geometrize?"
Generally, when you are looking at a long period of time where a chart has a number of historic highs and lows, any trendline or channel lines that connect these points will be very significant.
On the above chart, we see that the original trendline acted as support in 1987, 1990, and 2009. We now have the FIRST test of the upper channel line. Generally, the FIRST time something plays out in the market it is important. For example after a decline, the first time the 200 DMA is touched, it usually important (and vice versa). The implication is that this upper channel like should act as serious resistance.
The test of this upper line should elicit a reaction -- even in an ongoing bull market. If cycles coincide with price tagging a major angle as is currently the case, the implication is something more than a garden variety decline should play out, perhaps even a bear market.
One way to determine what could happen is to look at the last time the line was hit and see if there are any similarities. The prior time was the all-time high valuation top in 2000.
Are there any similarities to the new age stocks of that period and the explosive moves in cannabis and other story stocks and genetic and pharmaceutical stocks in 2014?
Does the tape feel similar to February and March 2000 and 2014?
One of the purposes for examining any similarities between 2000 and 2014 and whether testing the upper channel line is important is that a key problem with many economic theories is the assumption that humans are rational, profit-maximizing individuals. However, as behavioral science shows, we're emotional impulsive and overly focused on the short term.
While it is true that a high valuation never guarantees an imminent decline in price, it does imply that the risk of owning an asset is elevated.
Since high valuations at market peaks occur all over the place, how are we to gauge when there is a time to sell? Of course that assumes you subscribe to the notion that there is a time to buy and a time to sell. Even Nobel Prize Winner Robert Shiller stated something stunning in April 2012 about his own CAPE ratio:
"Things can go for 200 years and then change," he warned. " I even worry about the 10-year P/E -- even that relationship could break down."
This is why looking at cycles and patterns as opposed to purely economic models and valuations are relevant. Patterns repeat and people think in images.
Conclusion: Yesterday's report showed a daily SPX from June. The price action may be mirroring the pattern from October 1972 into early 1973.
SPX Chart:

Following a powerful rally from an October low, there was a shakeout with a nominal new high. Essentially, this is the same pattern that defined the topping process in July and October 2007 as well.
An hourly SPY chart for the month shows Train Tracks from Friday's open.
Hourly SPY Chart:

The market had every excuse to sell off on Monday following Friday's little reversal. However, the SPY scored a first-hour low after undercutting short-term support and once again rallied back to nearly unchanged on the day.
A late rally put the SPY in position to build on Monday's comeback with a little breakout on the bell. If the SPY off sets Friday's Train Tracks, the presumption is it will be in a position to move higher into the 1900 SPX area, where there is a cluster of trendlines as shown on the daily SPX above. March 21 to quarter-end are square 1910-1915 IF we see momentum. Alternatively, trade back below  SPY 187.50ish will trigger a small Triangle Pendulum sell signal, suggesting a giveback into Gapwindow.
The SPY and the SPX has gone four days without building on last Tuesday's momentum. Was that the beginning of a new leg up or climatic, exhaustive action?
The action in many high fliers yesterday, masked by the comeback in the indices, suggests selling pressure under the surface. Titles that saw some intense selling include the following: (WUBA), which left Train Tracks.

Tesla (TSLA), which looks like it has eyes for its 20 DMA as noted yesterday.

Our old friend Isis Pharmaceuticals (ISIS) extended to test its 50, and it is worth keeping on the long radar today as it may have a little double bottom at the 50.

Glamours FireEye (FEYE) and Splunk (SPLK) continued their givebacks.
Many leaders are in jeopardy of tracing out failed pullbacks if they don't turn up soon. A change in behavior from runaway mode to failed pullbacks when considering the big-picture pattern and the cycles noted above suggests it may not be business as usual.
No positions in stocks mentioned.



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