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Cycles Analysis
Using Cycles to Anticipate Market Highs and Lows
Do
you want to know the future? O.K., maybe not everything.
But how about the future direction of the stock market and your mutual funds. I've never
found a working crystal ball; but, I have found market cycles to be
the one of the best predictor of the future market highs and lows.
Imagine
an atomic powered super ball. The ball is dropped, strikes the ground
and moves up in a perfect arch until it loses momentum exactly in the
middle of the arch, when it comes back down to strike the ground and
because this super ball is atomic powered it continues on like this
for eternity. If you can picture this bouncing super ball then you can
understand the cycles in the markets.
The bouncing super ball helps create a mental image of a cycle. Market
cycles are very similar to this bouncing ball; but, let's cover
some significant differences. Where the atomic super ball will always
bounce to the same height and always have equal spacing from low to
low, market cycles, being a little more complex, do not cooperate as
well. First, market cycles tend to expand and contract around an average.
Meaning, if a market cycle length is said to be 9-weeks long, then normal
convention would say that it could be 1/3 longer or shorter (6 to 12
weeks) and still be considered the 9-week cycle. The second important
difference is that a market cycle rarely if ever makes a perfect arch.
Rather, they peak to the left or right of the perfect center. And a
third difference is the that amplitude or height of the cycle can vary
wildly from one occurrence to the next.
The Foundation for the Study of Cycles has catalogued about 20,000 cycles.
One of the most obvious and observable is the circadian cycle, the change
from day to night to day, which is caused by the rotation of the planet.
This cycle too expands, contracts and peaks at different times though
out the year; but, we find it useful all the same.
I have explained that market cycles don't stay exactly the
same from low to low. They don't peak at the center when they should
and the height of the move can not be prejudged. So, you may be thinking
that they don't sound like a very reliable market indicator. But, they
are and they can improve your mutual fund portfolio returns dramatically.
In 1967 with the help of a Cray computer, the most powerful mainframe
at the time, Dale Hurst, an aerospace engineer, conducted an exhaustive
study to see if there was a method to predict stock price movements
in advance. After 2.5 years of research he concluded that the most reliable
method was that of market cycles. While Hurst detailed that each individual
stock would have its own cycle set, he had found that the stock market
as a whole had discernable cycles. Hurst research uncovered a group
of interconnected cycles that worked together to predict future market
movements. Hurst reported that the strongest cycles in stocks were the
following:
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Cycle
Length
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13-week
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26-week
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9-month
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18-month
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4.5-year
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9-year
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Below is an illustration of what an ideal cycle that NFA tracks might
look like.
Here we can see how cycles would be if they worked perfectly. Two 10 week cycles
would make up each 20 week cycle. Two 20 week cycles would make up each 9-month
cycle two 9-month cycles make up each 18-month cycle. When a group of cycles
move together into a low it is called nesting or a confluence of cycles. The
nesting of cycles-- where all cycles are making lows at the same time, the 10-Week,
20-Week, 9-Month, 18-Month cycle lows-- can produce powerful declines into the
low and explosive rallies out of those lows. Theoretically, the more cycles that
collaborate to produce the low more dramatic it should be. When individual cycles
move alone the declines and rallies should be less sever. Now, however, from
the image you can see that rather than the next significant cycle being a reliable
36-month cycle (2 x 18-month); the next major cycle is 4-years or 2.5 18-month
cycles. This variation of length as well as the continuous expansion and contraction
of each cycle changes how and when the cycles interact with each other and this
is where prediction can go astray.
The use of cycles is art, not a science. Sometimes we will be able to see the
cycle quite clearly, other times the lines will be muddled. Sometimes they
behave in a predictable manner with the market declining into excepted cycle
low projections
and rallying up right out of those lows. However, at other times price movement
will ignore cycle forecasts. When they work they can be gold in your pocket
and your portfolio returns; but when they don’t they are treacherous. Take the time to study them
and use them with care. There are few market techniques that will tell you
9-months or
4 years in advance when the next market low should be. This can be valuable
information and well worth the time.
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