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October 13, 2012

Election Decline

With a fresh QE program in place, the least likely path many people see for stocks is for a substantial correction to unfold just before the Presidential election, but cycle analysis suggests this outcome is just what will happen. As cycle proponents know, a typical weekly cycle for equities... the time span between two, significant lows... runs 18-24 weeks. The higher the cycle count, the more likely a correction becomes, and the current cycle is already 18 weeks old.

Cycle analysis offers several tools for identifying such declines. The early indicators include a weekly swing high along with a cycle trend break.

Weekly stock market cycle

However, swing highs are not always meaningful, and trends can sometimes be redrawn, so final confirmation must come in the form of a failed daily cycle, which occurs when price breaches the previous cycle low.

Daily stock market cycle

The current daily cycle appears to already be in decline, but sports only a Day 8 high. Such an early peak necessitates a left-translated nature and also implies the cycle will fail... drop below the 4-Sep cycle low at SPX 1396... before the next low is found. Since daily cycles typically run 30-45 days and the current cycle is 28 days old, stocks should drop beneath the 4-Sep low... and perhaps a bit further... sometime in the next three weeks as equities find daily and intermediate cycle lows.

These details, along with the current state of gold and dollar cycles, will be discussed in detail in the weekend Member Letter.

Current Call - Oil
A quick update on the October 3 call to buy oil... crude found an extended daily cycle low on the afternoon following that post. I expect that low to hold, and the call to hold a long oil position remains in effect. If stocks continue lower, oil may face a bit of a headwind, but at worst, price should successfully test its low before beginning a more impulsive move higher.


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