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April 11, 2014

Equity Cycles in Breakdown Mode

The Big One Has Finally Arrived

Equity bears have endured one of the longest rallies in history, with stocks rising for two years without a respectable correction. The stock market typically suffers a large enough correction to take the S&P 500 to a test of its 75WMA once per year, but this rally has been so powerful that a yearly cycle correction was basically skipped last year. However, that long-awaited, respectable correction may have finally arrived.

This cycle failure is important on two counts. First, the current daily cycle sits on on Day 11. With a typical timing band of 30-45 days, stocks face at least a month of downside to reach the next daily cycle low. Second, the intermediate equity cycle is currently traversing Week 9, so from the weekly standpoint, stocks need up to three month to find the next intermediate cycle low.

The big question facing equity traders at this juncture is whether a yearly cycle correction will lead into a renewed rally or whether the recent peak will constitute a multi-year cycle peak, as well. Given that the current multi-year cycle is five years old... and multi-year cycles typically only run four years... the timing aspect would seem to favor a greater top. If so, the current correction may not stop with a mere test of the 75WMA, and stocks could suffer turmoil into 2015.


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