STOCKMARKET CYCLES
Prepared by Peter Eliades
The Cycles
(November 17, 2000) In our newsletter dated December 17th, 1999, we gave three separate cyclically based arguments that the Dow could reach a major top around the January 2000 time period. The first argument was based on the George Lindsay maxim which stated that all market tops have some kind of a bottom-to-bottom equals bottom-to-top count. Two of the most important market bottoms of the past 50 years were those of June 14th, 1949 and October 4th, 1974. Those dates were exactly 9243 days apart. If we project forward an equivalent 9243 calendar days from the October 4th, 1974 bottom, it would take us to a date of January 24th, 2000. The next cycle observation we made in that same newsletter was taken from a report written by Bob Hoye of Institutional Investors. He claimed that over the past century, "an unusual number of important market tops have occurred within the period one can call the turn of the year. This, along with a similar frequency of substantial reversals occurring near the end of a decade, makes this year-end ominously interesting." He goes on to point out how some of history's greatest speculative manias died out at the turn of the decade (more accurately, for those who, like ourselves, believe a decade does not end until the end of the zero year, at the junction of the nine and zero years of the decade). The most recent ones were the Japanese Nikkei which topped out on December 29th, 1989, and the gold market which topped out on January 21st, 1980. Both of those markets remain in a bear market to this day, over 10 and 20 years later. The final cyclical observation we made related to the first few trading days of January in years ending in zero. January 5th, 1920 was a five-year high, January 3rd, 1940 was a five-year high, January 4th, 1960 was a 16-month high, January 5th, 1970 was an 11-month high, January 3rd, 1990 was a four-month high.
As we know now, the Dow Jones Industrial Average reached a new all-time high on January 14th, 2000. Unless you had read our newsletter less than one month prior to that all-time high, you would have had little reason to believe that 10 months later, the January 14 all-time high would not have been surpassed.
A colleague of ours, Erik Hadik, makes an interesting cycle observation in his November 2000 newsletter. He points out that, going back to 1966, there has been a 7-year turning point or cyclic pattern coinciding with both important market tops and bottoms, and, unusually enough, sometimes both a top and a bottom in the same year. In 1966, the DJIA saw both a high that held for seven years and a low that held for 3-1/2 years. Seven years later, in 1973, the Dow reached a high that held for almost 10 years. Another seven years later, in 1980, the Dow reached a low that has never been penetrated since then. Seven years after that low, in 1987, the Dow again created both a high that held for almost two years and a low that has never since been approached. Seven years later, in 1994, the Dow reached a high in January that held for the rest of the year, and a low in November that was a launching pad for the most spectacular segment of the bull market. Needless to say, the next seven-year target is 2001. It will be interesting to see whether a top or a bottom of importance, or both, will be seen next year. Because a 20-year cycle low is due in 2002, our guess would be that if there is going to be a turning point of importance, it will be a top. Based on the history of these cycles, if it is a top, it would not have to be a new all-time high. It would simply need to be an inflection point that would not be surpassed for perhaps several years. We believe that is the most likely probability.
Technical Indicators
Perhaps the most telling of the current technical indicators are the sentiment readings. We have long maintained that sentiment readings can only be interpreted wisely if the underlying market movement is taken into consideration. For example, in a dramatic bull market where prices have been advancing for a long period of time, it would be expected that bullish sentiment would move to a high point and remain there for a long period of time. That, in and of itself, is not a bearish phenomenon. If, on the other hand, the market has been moving sideways or even down, and bullish sentiment remains high or moves even higher, this can be interpreted quite bearishly. That seems to be what has been occurring over the past several months. The chart depicts investor sentiment by subtracting the weekly percentage of bears from the weekly percentage of bulls. Notice that over the three+ year history of this chart, the highest bullish sentiment as expressed by bulls minus bears occurred just before the final explosive move to the upside which began in late 1999. This is an example of bullish sentiment growing as prices move higher and higher. We should inform you that, although this chart goes back only to June of 1997, the broad horizontal line just above 50 percent on the right hand scale marks the only four times bullish minus bearish sentiment has been that high since 1987 just weeks before the crash. Now notice what we consider to be a very bearish phenomenon. Each time the NASDAQ Composite attempted to rally after its precipitous decline between March 10th of this year and May 26 of this year, bullish sentiment almost immediately rose to the heights seen in late 1999 after the market had rallied relentlessly for over a year. Finally, look at the last arrow to the right of the chart. Amazingly, just last week, as the NASDAQ Composite remained 33% below its all-time high and had rallied for only a few days after testing its one-year lows, bullish minus bearish sentiment rose into the hallowed grounds just above 50%. Remember, this is almost the same degree of extreme bullish sentiment that was seen after one year of a continuous advance in late 1999, and the same degree of extreme bullish sentiment that was seen in August 1987 at that important top that preceded the crash. We could not conceive of a more bearish combination of sentiment readings and price movement.
Weekly NASDAQ
With Weekly AAII Sentiment
We believe that the most significant technical event this year was the Sign of the Bear signal generated on September 18th. It is of perhaps even greater significance than some prior Sign of the Bear signals because it occurred within 30 months of the previous Sign of the Bear signal in April 1998. Prior to this year, the closest Sign of the Bear signals were confirmed on February 1st, 1966 and October 29th, 1968, just 33 months apart. As we noted in a recent issue of our newsletter, we cannot be sure of the significance of Sign of the Bear signals given relatively closely together, but the October 29th, 1968 signal preceded the second most important top for secondary stocks over the past century by less than five weeks. From December 1968 to December 1974, the average share of stock and the average equity mutual fund lost between 70-80% of its value. We have now had double barreled Sign of the Bear signals given within an even shorter time period a than the two that culminated in October 1968. Because of the market's extreme overvaluation based on orthodox valuation measurements, we believe it is wise to treat the double barreled Sign of the Bear signals culminating on September 18th, 2000 with the greatest respect.
On October 18th, 2000, the Dow moved to its lowest level in 19 months. That low on the Dow was accompanied by a simple 10-day moving average of the Trading Index reading of 0.97. It would be very unusual to see a market bottom of significance form with such a relatively benign reading from the simple 10-day moving average of the Trading Index. In fact, the highest 10-day Trading Index reading between October 3rd and October 18th when the Dow fell over 1200 points intra-day was 1.00 on October 12th. Since the October 18th low, the highest, most oversold reading on the 10-day Trading Index has been 1.08 on November 13th. Mind you, we have seen market bottoms occur without getting to significantly oversold levels on the simple 10-day moving average of the Trading Index. As recently as October 15th, 1999, when the Dow reached a closing low which led to a 1700 point rally taking the Dow to its all-time high in January 2000, the 10-day Trading Index was only 0.94. The fact is, however, that is a rare occurrence. The great majority of important market lows are accompanied by 10-day TRIN readings of at least 1.30, and major market lows usually see readings as high as 1.50 or higher. It is interesting to note the difference in behavior between the conventional Trading Index moving averages and our own New 10 TRIN. For example , on October 15th, 1999, as the Dow was reaching what turned out to be an important closing low, the simple 10-day moving average of the Trading Index as we noted was at .94. The Open 10 TRIN was even lower at 0.886. The only Trading Index indicator that registered an oversold reading on October 15th, 1999 was our own New 10 TRIN with a reading of 1.34 and an even higher reading the following day of 1.45. Virtually the same thing happened in October 2000. On that day when the Dow Jones Industrial Average moved to its lowest intra-day reading in over a year-and-a-half, the simple 10-day TRIN was at 0.97 and the Open 10 TRIN was at 0.93. The New 10 TRIN, on the other hand, closed at a very oversold 1.58. Once again the New 10 TRIN showed its value. The movement of the New 10 TRIN after the October 18th bottom was also very interesting. By November 8th, the New 10 TRIN had moved from a very oversold level of 1.58 on October 18th to a fully overbought level of 0.777. On that same day, November 8th, the Open 10 TRIN closed at 0.94 and the simple 10-day moving average closed at 0.97. For both of those indicators, the readings were almost identical with their readings at the October 18th bottom. This is not to imply that the two more traditional indicators have lost their efficacy, but it is nice to know that we have our own New 10 TRIN as a confirming or a non-confirming indicator.
The front page chart of our October 6th newsletter showed the weekly advance decline ratio of the New York exchange going back to 1972. The most important aspect of the chart was the rising bottoms line that had supported all stock-market declines since 1982. We're showing a smaller updated version of that chart in today's news letter. As you can see, the weekly advance decline ratio remains above that important trendline. So long as it remains above that trendline, there is a bullish case to be made for the market. We believe a break in that trendline is imminent and if it occurs, it could well move this bear market into an acceleration phase to the downside. If it does not occur within the next six weeks, we believe it will almost surely occur early in the year 2001.
Weekly A/D Ratio
Market Projections
Twenty years ago, we would be surprised if five people out of a hundred recognized the word "NASDAQ." Today it is on the lips of virtually every adult in America. In fact, the NASDAQ has probably stung the lips and the pocketbooks of those who have followed it so closely over the past few years. Our price projection work suggests to us that the pain is far from over. From our weekly projection charts, we have derived a nominal 78- to 80-week projection for the NASDAQ Composite Index calling for 2,476.80 +/- 100 points. That projection was generated in late September and, although it would not be overdue until early 2001, it could be satisfied at any time between now and then.
Mutual Funds
We continue to be determined to continue our research into using systems for mutual fund switching. Because the Rydex Group of funds has no trading restrictions or penalties, they are the perfect vehicles for implementing such a Trading System. We will keep you posted on any progress we make over the next several months.
Rydex switchers are currently 100 percent in the Rydex Ursa Fund. Fidelity Select switchers are 100% in cash.
November 17, 2000 Peter Eliades Stockmarket Cycles P.O. Box 6873 Santa Rosa, California 800-888-4351