While long-time readers know that I simply abhor the predictions game, it seems that one of the most popular things I write about has to do with the historical cycles of the stock market. In the past week, I have received a handful of notes asking me to update the report I did at the beginning of 2012, which laid out how the markets had acted historically from a one-year, four-year, and ten-year cycle perspective. So, given that the market appears to be waiting on the start of the earnings parade right now, I thought this would be a good time to look at what the cycles say about 2013.
But before we begin, let me be clear that I commit the vast majority of my time to identifying what “is” happening in the market (as opposed to what I think “ought” to be happening). As I’ve mentioned a time or twenty, Ms. Market doesn’t give a hoot about what I think “should” be happening in her game or what “could” happen next. And it is for this reason that we do not allow the use of the words “should”, “could”, or “would” in our office when referencing the stock market action.
Let’s also be clear about another thing: I am NOT suggesting that anyone should invest according to what the cycles say. No, I believe that the best way to succeed in the long run is to stick with your investing strategy/discipline and to follow your systems. Although markets can make any strategy look silly at times, I truly believe this is the key to long-term success in the business of investing.
With that said however, I have found over the years that cycle analysis can provide a very nice overview of what to expect. In short, this helps us to be on the lookout for important changes in the trend of the market, which can make implementing trades easier on the psyche on occasion. But, I will have to admit that the cycle projections can indeed be a great guide to what lies ahead at times. And then at other times the cycles are, well… utterly useless! But, before you click the delete button, it is important to note that when the cycle composite is “on” it tends to be dead on! And believe it or not, the cycles have been more “on” than “off” in recent years.
Finally, it is important to disclose that I can’t lay claim to the cycle-composite concept. No, it was the fine folks at Ned Davis Research that originally put together a composite of the rolling one-, four- and ten-year market cycles and keep them updated each year. So, without further ado, let’s get to it.
The Cycle Projections for 2013
The good news is that the cycle composite suggests that the bull market will continue in 2013. The bad news is that (a) the cycles do not line up as well this year as they have in the past and (b) there might be some fairly significant bumps along the road.
For example, the one-year cycle shows stocks advancing fairly steadily through the beginning of May, then stumbles for a bit. However the pullback is projected to be short and sweet, and by the beginning of June, the bulls are back in charge. This rally takes the indices to new highs for the year until the traditional fall correction shows up in early September. But, by the beginning of November the cycle says it will be time to get onboard the year-end rally that will wind up pushing the index to the high of the year.
However, the four-year (aka the Presidential cycle) and the ten-year cycles paint a picture that isn’t quite as pretty – especially in the first quarter. In short, these two cycles suggest that a decent correction will begin in late-January/early-February before bottoming out (at a low for the year) in March.
In reviewing the cycle composite (the combination of the one-, four-, and ten-year cycles) it looks like the first half of January should be strong. However, from there until the beginning of March, it appears that stocks could first stagnate and then falter – falling into the red for the year in the process. Could this coincide with the expected budget battle? Only time will tell, of course, but it’s definitely something to keep in mind.
But from there, the composite says things look pretty good. After a quick rally-pullback phase in March, the cycle is fairly straight up into July, where things then turn sideways until the usual sloppy period begins in September. What is surprising is that unlike most years, this particular composite set doesn’t suggest a very strong year-end rally. Yes, things do pick up in November and December, but the composite index does not recover back to the highs set in July.
In sum, there are divergences in the cycles this year – almost immediately in February and then again in the fall. So, we’ll need to keep an eye on how the market tracks these projections to see if either will be of any assistance as the year progresses.
As I stated above, the important thing to keep in mind when looking at this type of analysis is that when the cycles are “on” the market tends to eerily follow the pattern. But once things go off the tracks, it can be quite some time before the market gets back in line.
So, while all of the above needs to be taken with about a block of salt, I believe it is worth being aware of what “could” transpire in the coming year.
Finally, it should be noted that the cycle composite is one of the 10 inputs to our Market Environment Model employed by the Daily Decision Service.
Current Market Drivers
My oftentimes meandering morning market missive began as a personal diary designed to identify the driving forces behind the market action. The thinking was that if I could both identify and understand why stocks were doing what they were doing on a short-term basis; I wasn’t likely to be surprised/blindsided by a big move. So, in keeping with this tradition, listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
- 1. State of the U.S. Economy (The economic data)
2. The State of the Earnings Season (The current parade kicks off today but really gets going next week)
3. Potential Changes to Fed Policy (The future of QE)
4. Budget Battle/Debt Ceiling (The “real” cliff)
The State of the Charts
While Monday was a down day, the decline didn’t inflict much damage to the charts. The good news for the bulls is that the near-term support at 1460 was tested a couple times during the day and wound up holding. As I mentioned yesterday, the bulls will be looking for a meaningful move over 1466 to signal the beginning of a new up-leg in the bull market. However, it appears that the bears are taking a stand in this area. Thus, some additional backing and filling could be the order of the day if the bulls don’t rediscover their mojo in the near-term.
- Current Support Zone(s) for S&P 500: 1460, 1445
- Current Resistance Zone(s): 1470, 1500
S&P 500 – Last 3 Months
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
- Short-Term Trend: Positive
- Intermediate-Term Trend: Moderately Positive
- Long-Term Trend: Positive
S&P 500 – Last 12 Months
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend – I.E. if there is any “oomph” behind the move.
Our momentum indicators remain moderately positive on balance, but as I’ve been saying, there is some room for improvement here. Below are a handful of our favorite indicators relating to the market’s “mo”…
- Trend and Breadth Confirmation Indicator: Positive
- Price Thrust Indicator: Very Positive
- Volume Thrust Indicator: Neutral
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Moderately Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide “early warning signs” that a trend change may be near.
- Overbought/Oversold Condition: No real change today. The S&P is currently overbought from a short-term perspective and remains modestly overbought from an intermediate-term view. So far at least, the bulls can argue that this is a “good” overbought condition given that there has been some “oomph” behind the move so far.
- Market Sentiment: Our sentiment indicators remain neutral again this morning. Recall that sentiment indicators are most useful when they are at extremes.
The State of the Economy
The overall health of the economy is a major input to the stock market. In order to help you stay up to date on all the important economic data, we publish a “State of the Economy” roundup each day. The report summarizes the day’s important economic data in an executive summary, quick-read format and then provides links to the most recent data, sorted by category. Here is a snippet from the recent report:
Most Recent Key Economic Releases:
- Employment Trends Index Up in December
The Conference Board’s Employment Trends Index was up the most in 10 months…
- NFIB Small Business Optimism Remains Weak
NFIB says concerns over the fiscal cliff weighed on the outlook…
Today’s economic releases include: NFIB Small Business Index early this morning (see above) and Consumer Credit at 3:00 pm eastern.
Here is the latest State of the Economy Report
You can also sign up to receive an email alert whenever the “State of the Economy” report is published.
The State of the Market Environment
I believe one of the keys to long-term success in the stock market is stay in tune with the market’s “big picture” environment in terms of risk versus reward. In short, different market environments require different investing strategies. To help us identify and evaluate the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
State of the Market Model Reading: Positive – This tells us the odds currently favor the bulls.
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
From The Equity Research Department
At StateoftheMarkets.com, our goal is to provide investors with everything they need to be more successful in the stock market. Here are the latest reports from our research department:
- State’s Top 100 Portfolio for 1/7/13
- The Chart of the Day: Time Warner Cable Inc – TWC
- The Focus List – The Top Stocks on our Radar
Remember to sign up for email alerts whenever our research department issues a report.
Turning To This Morning…
Things are fairly quiet in the pre-market despite a pullback in Asia and a plethora of economic data in Europe. European markets are modestly higher while U.S. futures are sagging at the present time. It would appear that traders are awaiting input from the earnings parade. (Monsanto reports before the bell and Alcoa officially kicks off the season after the close today).
Here are the Pre-Market indicators we review each morning before the opening bell…
Major Foreign Markets:
– Shanghai: -0.41%
– Hong Kong: -0.94%
– Japan: -0.86%
– France: +0.66%
– Germany: +0.12%
– Italy: +0.80%
– Spain: +0.71%
– London: +0.25%
Crude Oil Futures: +$0.36 to $93.55
Gold: +$7.00 to $1653.30
Dollar: higher against the yen, euro and pound
10-Year Bond Yield: Currently trading at 1.903%
Stock Futures Ahead of Open in U.S. (relative to fair value):
– S&P 500: -1.89
– Dow Jones Industrial Average: -18
– NASDAQ Composite: -3.22
Thought For The Day…We either make ourselves miserable, or we make ourselves happy. The amount of work is the same. -Carlos Castaneda
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Positions in stocks mentioned: none
P.S. It is my sincere hope that you are enjoying the new format for the “State of the Markets” report. The goal is to provide readers with an all-encompassing summary of the market environment. To be honest, the reason behind the change to the report format was selfish, as I wanted a single report on the key market data at my fingertips each day. Feel free to send us your thoughts on the new report (via the Contact Us Tab) as well as any requests you might have for additional data you’d like to see included in the report.
For up to the minute updates on the market’s driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
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