STOCKMARKET CYCLES
Prepared by Peter Eliades
The Cycles
(January 19, 2001) In our last newsletter, we reviewed a pattern discovered by Larry Haimsohn which pointed to the possibility that December 27th plus or minus one day would turn out to be an important market turning point. We concluded in that December 29th, 2000 newsletter that if the Dow were to move above the November 6th high just above 11,000, we would be forced to conclude that the December 27th date could have marked an important market bottom within three days. Conversely, if the Dow were to move below the December 21st low just below 10,300, we would probably conclude that the December 28th closing high could prove to be a very important one. Just 2 market days after the date of our last newsletter, the Dow moved slightly above the November 6th high on an intra-day basis, but did not close above it. So far, at least, it has failed to make a decisive move in either direction. Does that mean that the December 27th date was a non-event? Actually, December 27th still stands out as a potentially important date plus or minus one day on both the New York Stock Exchange Index and the Dow Jones Utility Average. In fact, the Dow Jones Utility Average reached a new all-time intra-day high on exactly December 27th and since then has made one of the most dramatic declines in history from an all-time high. Within 10 market days of that all-time high on December 27th, the Utility Average had declined over 20 percent and closed below its 200-day moving average. To put that in perspective, in 1987, in one of the great crashes in our security market history, the Dow Jones Utility Average declined 21.7% in 11 market days. We have just seen that same average decline 20.9% in only 10 market days.
The other market index where the December 27th date could still prove to be of importance is the broadly based New York Stock Exchange index. On December 28th, just one day later than the expected December 27th resolution, the New York Stock Exchange Index closed at 659.90. It was the highest close since November 8th and it has not closed higher than that since that day. So far, it has marked a potentially important turning point plus or minus one day on one of the most broadly based indices in the United States. We will see over the next few days, weeks, and possibly months how important that date turns out to be.
INDU Daily Bar Chart
DJIA With Speed Resistance Lines
We consider the first chart in today's newsletter a very important one. It is so important, we believe, that we have repeated it and updated it from the front page of the last newsletter. It is a chart of the Dow Jones Industrial Average accompanied by the 1/3 and 2/3 Speed Resistance lines drawn from the January 14th, 2000, all-time high to the October 18th, 2000 low. Almost three weeks have passed since the last newsletter and, although three weeks of price bars have been added to the chart, the chart remains basically the same. The Dow has continued to fail to break above the all important 1/3 Speed Resistance Line. Its last attempts were on January 3rd and 4th. The Dow has now made six separate attempts since October 18th without success. Each of those attempts has lasted from one to three days but was eventually turned back by the 1/3 Speed Resistance Line. The victory by the Speed Resistance Line, however, remains a hollow one because the Dow remains only 150 points away from the line. Over the next two-three weeks, we would say that two consecutive Dow closes above 10,950 or two consecutive Dow closes below 10,319 would settle the stalemate. In fact, the implication of two consecutive Dow closes above 10,950 would be that the Dow was very interested in testing its all-time highs. We do not believe that is about to occur, but two consecutive closes above 10,950 could change our mind.
Over the past few years, we have mentioned the innovative technical work of a gentleman called Ross Clark from Toronto, Canada. Ross sends us his technical musings every month or two and a few of his recent memos dealt with market performance in relation to the presidential or election cycle. His commentary on December 15th, 2000 anticipated a seasonal low on the Dow Jones Industrial Average between December 15th and December 27th. "Typically, the year-end rally has been 11 to 21 trading days. Normally, the high would be anticipated to be in place by January 10th."
"An even more important thing has happened as related to the election cycle. At no time since the 20th of October have the Dow industrials, Dow Utilities, Philadelphia Bank Index, S&P 500, NASDAQ, or Toronto Stock Exchange been able to close above their 34-day Bollinger Bands. This lack of any strength has been a precursor to a poor first calendar quarter. Since 1900 there are only five election time periods as weak as this; 1912, 1920, 1932, 1956 and 1976. In each instance the year-end rally produced the high for the first calendar quarter. Prices dropped an average of 11% (minimum of 7% and maximum of 20 percent) from the seasonal high before the end of March."
On January 17th, Ross sent the following update: "The Dow bottomed on December 20th... and was followed by an eight-day rally to January 3rd that perfectly achieved the upper Bollinger Band with an extreme overbought CCI reading. A confirming sell signal was given from the MACD on January the 9th.
"We've been looking for the Dow to start underperforming the NASDAQ and this appears to be coming about. Based upon the above criteria, we'd anticipate the Dow staying under pressure until at least mid-February. The five such previous equally negative years in the past century each closed below the lower 50-day Bollinger Band before being capable of sustaining more than a 4% rally. An excellent means of confirming a bottom is to wait for a MACD buy signal together with a close back above the lower Bollinger Band."
Ross goes on to say: "Bollinger Bands are merely standard deviation bands. They provide an envelope that contains the bulk of price activity. A move above the upper band shows price strength. The inability to even test it suggests ongoing price weakness. For the past 100 years, all five presidential election years that failed to show enough strength to exceed the band from October 20th through December 15th resulted in the year-end rally (through early January) providing the high for the first calendar quarter. Based upon this research, there has been a 100 percent reliability of no advance beyond the mid-January high before a 7% to 20% price break. As important, there has been no more than a 4% rally during the move down."
Those of you who are not acquainted with the MACD indicator can find more information on it in almost any recent book explaining technical analysis. It is an indicator devised by Gerald Appell.
If the pattern that Ross has discovered from prior election years leading into the first year of a presidency continues this time around , it is another argument that the Dow will not exceed the highs posted on January 3-4. It goes a step further, however, by suggesting there should be a decline between 7-20% on the Dow over the next several weeks. We will follow the pattern with interest.
Technical Indicators
As most of you know by now, we contributed a chapter to the Bloomberg book called "New Thinking in Technical Analysis--Trading Models from the Masters." One of the 11 other contributors was Bernie Schaeffer, an options expert who relies heavily on sentiment
data to determine his market outlook. Another simple indicator that Bernie uses to delineate a bull or bear market is a simple moving average on a monthly chart. In fact, he uses two monthly moving averages, one of them a 20-month and the other a 40-month. In looking over the monthly charts of the Dow, the S&P 500, and the NASDAQ Composite, It is easy to see that those moving averages have been very useful over the past 10-15 years. The Dow Industrials have not closed below their 40-month moving average since July 1982. There have been temporary closes below the 20-month moving average since 1982, but since January 1991 the greatest number of consecutive monthly closes below the 20-month moving average occurred in August and September of 1998. In November, the Dow closed below its 20-month moving average. In December, however, it closed back above the moving average by 53 points. As this section of the newsletter is being written, the Dow is once again below its 20-month moving average. We will follow the progress of these important market indicators in respect to their 20-month and 40-month moving averages and continue to report those results to you over the next few months. We have charts of the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite, all accompanied by their 20-month and 40-month moving averages. Notice the continuing divergence between these three basic market indicators. The NASDAQ Composite has closed below its 20-month moving average for four consecutive months, and it also closed below its 40-month moving average in both November and December. The rally of the past two weeks, however, has moved the NASDAQ Composite back above its 40-month moving average, and this could be very important territory to determine whether the short term holds more risk for the NASDAQ Composite or whether it has succeeded in climbing back up above its 40-month moving average and perhaps thereby reestablishing itself in a potentially positive configuration.
S&P 500 Monthly With 20-Month
40-Month Mas
DJIA Monthly With 20-Month
40-Month Mas
NASDAQ Composite Monthly With 20-Month
40-Month Mas
The sentiment indicators continue to show an amazing amount of bullishness, especially in light of the market's behavior. The Investors Intelligence survey of newsletter writers (New Rochelle, New York,) shows the greatest amount of bullishness since mid-1999. It is an amazing and disturbing statistic, especially in light of the market's underlying behavior. These are the kinds of statistics generally seen after a long market advance. Buttressing the bearishness of those statistics are the statistics relating to the assets in the Rydex Group of funds. As of Thursday, January 18th, the assets in Rydex Ursa plus the assets in Rydex Arktos (the fund which sells short the NASDAQ 100) were at their lowest level in at least six months, and perhaps much longer than that, but as we are writing this, we do not have access to that data. In any event, it is clear that aggressive bearishness is virtually nonexistent at the Rydex funds. Again, in light of the underlying market action, we consider this potentially very bearish.
Market Projections
Subscribers often asked us to give examples of our market projections. The chart in this section shows an hourly (65-minute) Dow chart with an offset of 145 periods. That offset is equivalent to 24.2 market days, and it is the offset we use to determine nominal 10 week projections. The Dow reached a high of 11,028 on an intra-day print basis on January 4th. That high is labeled on the chart. On January 10th, the Dow broke below the offset line at a price of 10,556.50. That price should mark the halfway mark for the nominal 10-week projection, so the projection works out to be 10,085.00 plus or minus 95 points on an intra-day print basis. That projection will remain in effect until it is either invalidated or met. The invalidation of the projection would occur if prices moved back above the offset line prior to reaching the projection.
INDU 65 Min (T) Single MAV
Mutual Funds
Fidelity Select switchers purchased Select American Gold on December 6th and continue to hold that position through today, January 19th. Rydex switchers are in the Rydex Ursa Fund.
January 19, 2001 Peter Eliades Stockmarket Cycles P.O. Box 6873, Santa Rosa, California 800-888-4351