S&P: Four Year Cycle
I received an email from a reader who wanted to know if the four year cycle low was already made or is it due in March 2007 like many cyclical analysts are predicting. Well in my opinion I think the four year cycle low was already made last June and that is part of the reason why the market rallied in my opinion. Most people were looking for the low to be made in October 2006 but as you can see the low was made four months earlier catching many traders off guard.
I've read that many people who follow this cycle are forecasting that the 4 year low will come in March 2007 but I don't think that is correct.
If you look at the above chart you can see the four year cycle and how accurate it has been. The horizontal lines you see on the chart are EXACTLY the same distance apart. The June 2006 four year cycle low came right on time. I don't see how people can forecast a March 2007 low because that would be out of the "time window" for this cyclical low, and if you are going to allow that much variance for a low, that would make this cycle sloppy and difficult to trade. The four year low was made last June....End of story.
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7 comments:
There is an interesting article from Businessweek:
http://www.businessweek.com/investor/content/dec2006/pi20061204_799755.htm
I would like to point out the 4 year cycle that revolved around 1987. The 1987 crash wiped out many traders and investors, however, it proved to be just a footnote to an otherwise bull market.
As well, we have to place the 4 year cycle against bond market yields. It is my professional opinion that the $TNX cycle that started in 1965 has now ended. If you plot the $TNX on a chart, then you can see that it peaked around the early 1980s and then came down from there. The market during the 80s and 90s rallied as bond yields dropped.
The rising $TNX seems to have a negative effect on this current market. In fact, it appears a rising $TNX had a negative effect on the market throughout the 70s.
Therefore, the 4 year cycle is not immune from events of cataclysm or accident. The rising interest rates, as well as the rising price of oil, have me concerned. These factors can give rise to such accidents.
The market had concluded over the summer that low interest rates were here to stay and lower oil prices were in the future. They were right for a short period of time, but I would like to see what happens when the $TNX crosses over 5 and the price of oil goes over $70.
During the 70s when both interest rates and oil were rising, the P/E of the S&P500 was in the single digits and went to as low as 5. The historical average for the S&P is 15.7 and it appears the P/E for the current index is dropping. This means that companies will have to deliver higher earnings to keep it from falling below the historical average. Once it dips below the 15.7 line then history dictates that it will fall even further and possibly into the single digits.
I fail to see how these companies will be able to deliver higher earnings in a rising energy/interest rate environment. There are a few other factors as well such as the dismal savings rate, high usage of credit and how salaries have not kept up with inflation.
The time to have gotten into an S&P500 index fund was in 2003. when the market was hitting new lows. I believe the 401k investor is better served today with a balanced fund of bonds and quality value stocks.
I like your analysis, however, I think we should take into considerations all factors in regards to this index.
Dr. Michael Roberts
www.marketbarometer.blogspot.com
Very good point, thanks for the comment. If you have been reading my blog you would know that I am bearish on the market and have a short position in the Nasdaq which I have been holding since late December. The reason I posted this chart of the 4 year cycle was just to clear things up for one of my readers.
I don't think the market will go back down below the June 2006 low , but I do think a retracement of at least one third is very likely.
That's right. I think the market will trend lower for a few months but I'm not looking for a bear market... just a one third or maybe even a 50% correction of the recent rally.
Doesn't look low to me. I'm looking for something in the 500-750 area, that kind of low.
In good case testing the 2002' lows, in bad case going back to 1994.
I'd have to really agree with your analysis here. I started playing the market in July 2006 and I've tracked the lows for the markets I've played in, and from where I started, they have all rallied enormously.
I show the Dow up 17.8% from its low, Toronto up 14.3%, Nasdaq up 21.7%, Venture up 28%, and the S&P up 17.3%.
I have to agree with the year over year earnings comparison issue. This is going to become more difficult in the next couple of quarters. The wildcards are energy prices and fed policy. The other issue is the seasonal weakness inherent in the first half of the year combined with a profitable 2006 may require a fair amount of tax selling to pay the IRS.
To Deborah: It's great you started "playing" the market at a nice low point. I started "gambling" in August 2002. My lesson leared is the market WILL cause you grief if you get too complacent or too greedy.
Peace
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