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October 20, 2013

Unusual Equity Behavior

The past week's stock market action was a bit perplexing. The decline off the 19-Sep peak put equities into a confirmed daily cycle decline. Leaving behind a Day 13 peak, the cycle should have formed as left-translated and led the charge into a weekly cycle low. Instead, stocks formed an abbreviated cycle count and launched into an extension of the weekly cycle rally.

This unusual behavior follows the decline into the June low which behaved in every way like an intermediate-degree decline, save for the absence of a failed daily cycle. We have now witnessed two scenarios in the past four months in which the cyclical setup necessitated more downside. Rather than forming failed daily cycles, however, those declines halted abruptly, giving birth to screaming rallies.

In fact, the equity market has not formed a failed daily cycle in nearly a year. This unusual behavior cannot endure, and I believe these screaming rallies... this most recent pop has added 100 handles to the S&P 500 in under eight sessions... are part of an end game. The Fed's no-taper decision has not made the stock market bullet proof, but rather acted as a catalyst for the blow-off phase of a cyclical bull market.

Stocks are also 16 weeks into an intermediate cycle. With an intermediate cycle low due sometime in the next eight weeks, I expect this latest rally to fizzle quickly and lead into a surprisingly-sharp decline. Keep in mind that "quickly" references only the time aspect of this rally. Stocks could very well top SPX 1800 before this all ends, but either way, I expect a top within a couple of weeks.


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