The less long term - part 2

We discussed and gave you a visual of the long term Kress cycles (120yr, 60yr, 40yr and 30yr) and you saw that in theory they all should bottom together in the second half of 2014.  This alone should make one wary of the market as I question just how precise these predictions are when it comes to an exact date.  Heck, if your are within 2-3 months on these long cycles I think you would call it a direct hit!!!

But, that is just part of the story as there are 12 cycles in the Kress cycle series.  The cycles shorter than the long cycles are still longer than most of us trade (definitely too long for swing trading).  They are the 24yr, 20yr, 12yr and 10 year cycles.  There are 5X24 Year cycles, 6x20 year cycles, 10x12 year cycles and 12x10 year cycles in the 120 year cycle.  And guess what - they are all scheduled to bottom in the second half of 2014.

Here is a visual:

Also of interest is the Fib (1,2,3,5,8,13,21.....) relationship of the Kress cycles:

3x8 = 24
2x2x5 = 20
2x2x3 = 12
2x5 = 10

If you pursue this you will see the Fib relationship can be extended to the longer cycles.

The really longgggg term - part 1

Depending on whom you follow determines the combination of cycles with which you are familiar.  Maybe it is the Hurst cycles (developed by JM Hurst).  Or, maybe you are a fan of Gann (cycles are generally based on 360 degrees in a circle).  Or, possibly you follow Martin Armstrong (he identified the Pi cycle).  David Knox Barker follows the Wall and  Kitchin cycles (I like their application to swing trading).

Then there are the cycle groups developed and followed by Bud Kress (I believe he passed away recently, but Clif Droke is a disciple you can follow).  Today our long view will be developed using the Kress Cycles.

The numeric time cycles which comprise the 120-year series include the 60-year, the 40-year, the 24-year, the 20-year and the 12-year. The 120-year is the primary composite cycle according to Kress. It includes three 40-year primary bias cycles and five 24-year primary direction cycles. The 60-year secondary composite cycle (which is analogous to the "K Wave") includes three 20-year secondary bias and five 12-year secondary direction cycles. As Kress points out in his latest report, "Excluding both composite cycles, this leaves four cycles which determine the market directional behavior for the three designations of time – years, quarters and weeks." In total, there are twelve cycles comprising the Kress cycle methodology.

The 120 year cycle  prior bottoms were 1774 (Revolutionary War period), 1894 (beginning of the industrial economy) and 2014 (expected bottom - beginning of a new social order - socialism).  So the 120 year Grand Super Cycle is often referred to as the revolutionary cycle (political revolution - 1774, economic revolutionary - 1894, social revolutionary - 2014). The secondary composite cycle is the 60 year K wave cycle (last bottom 1954 (which was the top of the 120 year revolutionary cycle).

Here is a visual of the longer cycles of the Kress Cycles:

 

All these cycles should bottom in late 2014 (now that should be a bottom to write home about).

Next (part 2) comes the less long cycles (24, 20, 12, and 10 years).  The 24 year cycle peaked latter part of 2002, the 20 year cycle in 2004, the 12 year cycle in 2008, the 10 year cycle in late 2009.

Oulook for week of Jan 27 and Feb 2014

In my outlook for 2014 I showed a series of charts (and gave reasons) to be wary of the market.  My cycle chart (below) indicated a top mid  January.

And I posted a comparison of 1929 and today's market.  If that comparison works out then we should have seen a market high followed by a steep sell down.  We got  a new high and possibly the start of a sizable pullback.  Time will tell - here is that comparison:

And in my outlook a couple of weeks ago I indicated a top coming (seems I may have been a week or so early as I expected a couple of hard down days last week and had indicated  a target of 1790.  Now I need to revise the possible downside based of the 100 day Wall cycle (as the 1790 projection was using a shorter DPO of the half Wall cycle). Should  lower the downside target for next 10 weeks.

Last week  I gave you several reasons to be wary of the market even though I expected more a sideways than a down market (got that wrong). Some questioned my conclusions (but I try to avoid technical fights) so my response when asked about the longer cycles: 

"But, keep in mind it may take several months (say 20% of the total cycle or 6-8 months) to go top to bottom. In other words except for 1987 it has taken more than a very few days to achieve a correction. Note: the markets normally take longer  (usually 70-80% time wise) to go up and less time (20-30%) to correct."

This week seems there were a lot of future layoffs announced (IBM, TI, Sam's Club,  and several others).  When you start seeing lots of such announcements makes you say hmmmmm....  Earnings continue to be less than stellar as a whole.

Looks like we may be repeating the pattern we saw back in Aug/Sept the last time the  we saw a Wall cycle top and half Wall cycle bottom together.  The difference maker this time is the 1/3 Kitchin cycle is also topping and turning down so the downside may be greater??  Time will tell.

Here is a visual.  I suspect with the 1/3 Kitchin cycle down and Wall cycle down thru February and into March.   Usually every 3rd Wall cycle sees the larger decline when it is bottoming in sync with the 1/3 Kitchin cycle (August Wall bottom?).  The 1740-1750 target does not account for the impact of the 1/3 Kitchin cycle.  I will try and account for that at a later time.

GL traders

Update:  Looking at the lower trend line we should expect support around 1740-1750 so that is the next potential downside:

Of course Yellen's first act may be to "untaper" and increase QE to try and prevent a substantial market correction.  If that happens it could postpone a correction for a short period of time.

Jan 20, 2014 weekly outlook

Another sideways week.  After Monday it appeared we may be in for a down week of a few percent, but nearly all that was lost Monday was regained Tuesday and Wednesday.  In some cases indexes made new highs.  Market moved down moderately Thursday and up Friday.  So for the year so far the market is essentially flat. 

It appears all the new retirement money (401k, IRA, pension funding, etc.) has failed to move the market higher.  A lot of fuel burned without a launch of the rocket.

The talking heads on TV keep telling us about the positive #s.  Still it looks like retail for the 4th qtr 2013 was not healthy (Best Buy and others).  Consumers make up about 70% of the US economy, so it is hard to understand how the economy is doing well.  Employment number were pathetic (74,000).  So far earnings reports have not been that great (about 50% of companies just met or missed estimates).  Mortgage applications have been declining since May.  Building starts are declining and permits going forward are less still.  Auto sales are softening.

Despite 'blaming' the drop in the cost of dry bulk shipping on Colombian coal restrictions, it seems increasingly clear that the 40% collapse in the Baltic Dry Index since the start of the year is more than just that. While this is the worst start to a year in over 30 years, the scale of this meltdown is only matched by the total devastation that occurred in Q3 2008. Of course, the mainstream media will continue to ignore this dour index until it decides to rise once again, but for now, 9 days in a row of plunging prices is yet another canary in the global trade coalmine and suggests what inventory stacking that occurred in Q3/4 2013 is anything but sustained.

So fundamentally I see little that is positive as bank exposures are back at levels last seen 2007/2008. 

http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq313.pdf

Notional derivatives increased $6.2 trillion, or 3%, to $240.0 trillion. Notionals have now increased for three consecutive quarters, after having declined in five of the prior six quarters.

Money Flow (MFI - see following chart) is down for several months now as stocks advanced. This means stocks advanced on less and less money.  Eventually this stops and Money Flow and stocks move together. 

The Wall cycle has turned down, the qtr Wall cycle has turned up for 2+ weeks.  The half Wall cycle has turned up for about 5 weeks (thru Feb).  So the market continues sideways with possibly a slight upside bias next week.

Here is a visual:

GL traders

 

Week of Jan 13, 2014 outlook

Minor downside during the past week, but really more sideways than down.  Seems market is down most of the day and recovers last hour to close slightly down or mixed for the day.  A lot of money entering the market that last hour to support the market.  Looking at some of the statistics retail investors have less money in cash and bonds and more money in equities  - levels last seen in 2007.

I believe this support without market advance will result in some downside pressure.  If that is correct we may see a couple of note worthy down days next week. 

Here is a visual:

GL traders

The 1929 analog

Does the 1928-1930 tells us how 2013-2015 will look?  McClellan gives us a chart:

 

week of Jan 6, 2014 outlook

 

 

 We are at or near a top.  If we get a repeat of late Aug and early Sept (Wall cycle topping with half Wall bottoming) then we get a 4-5% pull back into mid Jan a retest of current highs by mid March.

GL traders

 

 

Outlook for 2014 - part II

The second part of our 2014 outlook is based on how the cycles align.  Recently the market does not seem to align with our cycle projection.  Ever so often we seem to get a short cycle (or long cycle) in the cycles we follow for swing trading.  According to some authorities I have read these variations in length conform to Fibonacci ratios.

When this happens we see highs when we were expecting pull backs (like now).  Never argue with the data, but adapt positioning the cycles to match the data.  So I have attempted to do this. It appears we will make a yearly high around mid-January 2014, a yearly low around mid-August.  Lesser highs around mid-June and late October.   A lesser low around the first of April.

These projections do not attempt to account for longer cycles that should bottom in the second half of 2014.  There is the Grand Super Cycle (120 years - 1774, 1894, 2014?).  This cycle divides into 2 K-Waves of 60 years (1894, 1954, 2014).  Each K-Wave divides into 2 Super cycles of 30 years (1954, 1984, 2014).  Of lesser degree are cycles of about 7-9 years (Juglar or  Pi cycle (3141 days/8.6 years)), and the Kuznet cycle of 15-17 years.  Kress used 40 year and 12 year divisions of the longer cycles I believe.  Needless to say some are projecting a very serious downturn in 2014.

Here is 2014 graphic projections:

Happy New Year and a profitable 2014

Outlook for 2014 Part 1

Seems every talking head on CNBS (and most bloggers) see nothing but blue skies for 2014.  But there are negatives - the longer the market extends the bull run the nearer we are to a turn down (that is a fact and not subject to debate).  So as the market moves higher I become more negative about the market future.  Do I know what the market will do in 2014?  Absolutely not.

You have lots of gurus telling you the positives so I will discuss some of the cautionary signs:

1).  At more than two standard deviations above its 50-day, the S&P is actually the most overbought it has been since mid-May.  So near term (say first quarter 2014) a correction of 10% would be normal given this.

 

 

2). The percentage of bullish individuals rose to 55.1%, the highest level in nearly three years, in the week ended Dec. 25, according to the American Association of Individual Investors. That was a jump from the 47.5% of investors who said they were bullish the previous week. See item 1 (suggests market over bought and a correction would be expected).

3). The market for junk-rated loans increased to $683 billion, exceeding the 2008 peak of $596 billion, according to Standard and Poor’s Capital IQ Leveraged Commentary and Data. We are seeing levels that break prior peaks in several areas.  Expect these extremes to get corrected (I suspect sooner rather than later).

http://www.bloomberg.com/news/2013-12-23/junk-loans-top-08-record-as-safeguards-stripped-credit-markets.html

4)  The talking heads on CNBS keep telling us how reasonable the PE is, but the CAPE (10 year average of price/Earning) is a better predictor of future stock action.
The Cape in the mid 20s is at levels more commonly seen at market peaks.

5).  Stocks are rising on low volume.  A strong market normally rises on increased volume so this is a concern.

6).  Margin debt is at levels seen in the early 2000s and 2007.  People/institutions are borrowing large amounts of $s to buy stocks.  This is a quicksand foundation supporting stock prices.

 

7).  There is no fear.  See item 2 - AAII bullish percentage.  The VIX is known as the FEAR index.  It has been low for several months.  The last time you saw the VIX this low for this long was 2007-8. Caution is indicated.

8). The MSM talking heads keep talking PEs based on 2014 forecasted earnings to predict higher stock prices.  It is fairly normal for earnings forecasts to decrease over time so these 2014 projections should be viewed with some skepticism.  

9).  In 2013 the rate of revenue growth slowed down, profits rose primarily due to increased margins.  There are limits as to how much companies can cut costs and increase margins and they are probably close to that limit. Future profit growth will depend more on economic growth.

10). See item 4 (CAPE).  Even the regular PE is starting to get a bit high because in 2013 the increase in stock prices was due primarily due to increased PEs and not earnings growth.

These are only some of the challenges the economy and stock market will face in 2014.  There are items like ACA (Obamacare) that start to get more fully implemented over the next couple of years (partially postponed into 2015 by Obama).  It seems unclear of the total impact of this.  We know that state run health care in other countries have proven to be burdensome and ineffective.  We also know that over 30 taxes/fees go in to effect in January.  Resources diverted to health care cannot be spent on housing, autos, clothing and travel so this will have a dampening effect on the economy.  It is uncertain how extensive this effect will be.

There is also the Dodd/Franks bill that financial institutions have to deal with.  This will probably increase the cost of credit. This may impact fees retailers can charge for the use of credit cards. The cost to the consumer of this added regulation by multiple government agencies is unknown at this time.

 

2013 end-of-year outlook

The FED announcement of "taper" seemed to turn the market.  Not sure I understand it - $10b a month is a small fraction of the $85b a month of QE being inserted into the monetary system by the FED.  Of course - when looking at M1 velocity one sees M1V has quit going down and is now flat which implies that the FED needs to stop printing money or they are going to cause serious inflation.  Also, much of the derivatives that existed back in 2008-9 have been offset, cancelled or expired (for example AIG has cleared their balance sheet of derivatives and paid back the government) so this destruction of fiat currency is no longer threatening a deflationary recession and inflation is more likely.  Here is M1V showing that monetary velocity is ready to turn up:

I expect though that the FED taper move has been more than compensated for by the market.  We now have had the short 10-11 TD cycle up for about 5 days so it should turn down into the end of 2013 (start of 2014) then a short up tick of 4-5 days an then down into mid-January (4-5 days down) where we have a full moon.

Here is the SPX with annotated expectations:

Merry Christmas, Happy New Year and GL traders