Thursday, May 27, 2010

The Stock Market's Amazing 3 1/2 Month Cycle

What a day today in the market! Stocks were up across the board and the only red ticker on my screen were the bonds and the VIX.  Stocks surged after China made positive comments regarding Europe. We all saw that coming didn't we?

Above is a daily chart of the S&P with over 2 years of price data which is an adequate amount of time to notice a repeating pattern. I placed arrows to help identify a very dominant 3 to 4 month cycle that has been running through this market for quite some time. Every 3 or 4 months, the stock market has a very strong tendency to put in a bottom from which rallies have taken place.

As you can see in the above chart, this cycle is due around now and in my opinion it appears that this cycle low is in place. Notice in the lower panel the stochastic oscillator is in the buy zone which has coincided with previous cyclical lows.

Based on the above chart I feel we will rally for several weeks but long-term I am still bearish on the market. In 2008 I highlighted in yellow a cyclical low which was nothing more than a dead cat bounce. I feel that is what we are witnessing take place right now. I think we'll see stocks rally, but the market will not exceed last April's high.

Keep in mind the stock/bond ratio chart has changed it's trend in favor of bonds although there was a pullback today.. The uptrend line (not shown) in the S&P drawn off of the March 2009 low has also been violated which means the uptrend is over.  We also have the 4 year cycle low due later this year in the fall.

So how will I trade over t he next few weeks? Short-term I'll buy the dips and consolidation breakouts but as soon as I see signs of the bear emerging from its cave, I will be very quick to begin my glorious shorting campaign once again!


Anonymous said...

Keep us posted on the bear sighting. My theory is 2010=2004, the same way 2009 mimicked 2003. Meaning lower highs and lower lows into the summer or fall. But, you could be right that a second crash is possible. There is no shortage of potential causes for that.

Anonymous said...

Thanks for the informative post. I am going to follow you on this one.


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