Seeing how investors psychology affect all security prices through the boom/burst cycle of optimism and fear, technical analysts are devoting an entire field using cycles theory to predict this repeated pattern. Similar to natural scientists, they identify reliable temporal patterns and cycles that have stood the test of time. I would like to review those cycles in this article, but first I need to warn that this analysis is not something to depend stricly upon, for the simple fact that they are not as strong order flow generators as macro factors can be for example. That being said they are consistent enough to be considered by technical analysts when they time long-term investments, so I still find interesting to look at them.
The longest cycle I want to review is the well-known Kondratieff or K-wave cycle. A large academic body of knowledge is attached to this theory, but even if it is an intellectually stimulating topic, it is not really actionable. It is too long in duration to be important for trading purposes, averaging around 60 years in time, but more importantly have not enough history to be statistically relevant. It is also vital to understand that not every researchers agree on the dates of peaks and troughs. An acceptable dating is the one proposed by George Modelski and William Thompson which validate the last troughs in 1792, 1850, 1914 and 1973. The next projected low is expected around 2020/25 which confirm the projections of the US birthrate theory that project it in 2020. In fact researchers have found a strong correlation between the stock market and US birthrate advanced 45 years:
Next come the famous secular trend which last for about 34 years, a 17 year period of dormancy followed by a 17 year period of intensity. I say famous because I believe it is the most popular cycle that analysts are refering to in the common media. It is statistically more reliable than the Kondratieff one, and it is interesting to note that commodities are also linked to this cycle as when stocks go through the dormancy period, commodities rallies and vice versa. The next major low projected by this cycle come around 2017-18. (I would likely review this cycle in latter articles because many interesting studies and theories revolve around it).
Next come an important part of cycle analysis that is referred to by technical analysts as seasonality.
Taking a look at the decennial pattern, commonly use due to the price tendency in the stock market to have similar characteristics every ten years, it appears clearly how this decay is following its predecessors pattern. It is important to remember when studying seasonality that direction is more important than levels. True, this decay start is better than its historical averages and can even be consider a little overbought, but the direction seems to be repeated again. Interestingly enough, if the pattern continue to fit past history, this uptrend will continue until August 2017. I would like you to notice that it is also predicting some kind of range trading this year that fit with the presidential pattern, our next topic.
The presidential cycle is likely the most well-known temporal pattern in the market today. It is reliable and backed by many studies on a long enough time span to be classified as statistically relevant. This pattern is signaling a correction for the stock market in 2014 from mid-April to the start of October. I find very interesting the fact that it fits with the range trading we identified on the decennial pattern. After this unfavorable time passed, stocks are forecasted to rally until the next election in November 2016. When the next presidential cycle first two years under performance kicks-in this will be in agreement with the slightly up but still flatish end of decay usual average.
Taking a look at the decennial pattern, commonly use due to the price tendency in the stock market to have similar characteristics every ten years, it appears clearly how this decay is following its predecessors pattern. It is important to remember when studying seasonality that direction is more important than levels. True, this decay start is better than its historical averages and can even be consider a little overbought, but the direction seems to be repeated again. Interestingly enough, if the pattern continue to fit past history, this uptrend will continue until August 2017. I would like you to notice that it is also predicting some kind of range trading this year that fit with the presidential pattern, our next topic.
The presidential cycle is likely the most well-known temporal pattern in the market today. It is reliable and backed by many studies on a long enough time span to be classified as statistically relevant. This pattern is signaling a correction for the stock market in 2014 from mid-April to the start of October. I find very interesting the fact that it fits with the range trading we identified on the decennial pattern. After this unfavorable time passed, stocks are forecasted to rally until the next election in November 2016. When the next presidential cycle first two years under performance kicks-in this will be in agreement with the slightly up but still flatish end of decay usual average.
Putting all the pieces together, we can summarize that following technical analysts cycle theories, stock market should keep the uptrend ongoing till the next presidential election after this year dangerous time window has passed. The end of this decay should then produce a major low for stocks that is in line with the secular and Kondratieff projections, ence the title of this post: "Cycles within cycles".
To conclude I just want to repeat that one problem with the theory is that a large enough sample is not possible yet, and that such projections could be the result of chance. It is something to keep in the back of an investor’s mind but not something to use alone to commit funds to the stock market.
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