Super Cycle Critical Point

We may be at a critical point for the start of the third super cycle for the U.S. stock market since 1900. We have not even yet confirmed that we are actually in a secular bear market (a condition necessary to have the opportunity for a super cycle bear market). However, a break below current long-term support levels would virtually assure that both events were occurring.

We looked at the prospect of a primary bear market in January. With the primary bear market now well established we wonder how much further the market may decline.

Short-term support is found at the most recent market low. Long-term support is defined by previous resistance levels at market tops in the past. These are shown in the following graph and subsequent table.

In the table below are shown the four support levels identified in the graph, along with the loss each represents from the market top of 10/9/2008.

If we break support level 1 around S&P 500 776 the probability of a new super cycle bear becomes much greater. If we break below support level 2 (680) a new super cycle low is virtually assured. If this occurs we can only hope that the bottom comes somewhere above support level 3 (482).

Looking at some fundamental factors of the last super cycle bottom (1974), we are drawn immediately to the P/E ratio, which bottomed near 7. Some recent P/E history (from S&P Index Services) is shown in the following table (2007 and ¾ of 2008 are actual; 4Q 2008 and 2009 are estimates):

The current market is a long way from the 1974 P/E. The following table shows +/-20% variations from and S&P 500 index values at the four support levels (graph above):

The picture is alarming. There is still a lot of downside potential for this market if (1) we are in the third super cycle bear market since 1900 and (2) we are to reach the single digit P/E ratios historically seen for super cycle lows.

The recent intraday low (11/13/2008) of 818.69 is 47.7% below the 10/9/2007 market top (1565). This is very close to the first support level (776). That is why I believe we are at a super cycle critical point. We should very soon find out which way the chips will fall.

 

Comments

[investor88:]

Excellent article with very useful charts and other data. John has been cautious in being quite neutral as to which way the chips will fall. On balance taking into account market action and the fundamental economic backdrop, I think the supercycle critical point will break DOWN not up. Time is the arbiter, let's watch events unfold and tell us.

2008 Nov 17 08:27 AM

[TimR:]

Interesting.

What is the time frame for the other super cycle bear markets?

2008 Nov 18 02:23 AM

[John Lounsbury:]

TimR - - -

See my article Stock Market Cycles, Part 6: Super Cycles

seekingalpha.com/artic...




On Nov 18 02:23 AM TimR wrote:

> Interesting.
>
> What is the time frame for the other super cycle bear markets?

2008 Nov 19 01:32 PM

[John Lounsbury:]

Correction: 1565 was the S&P 500 market top of 10/9/2007 (NOT 10/9/2008).

2008 Nov 20 10:03 AM

[sleepless_o...:]

I am reading this article on Nov. 24, following a sreong rebound back above support level 1. It will be very interesting to see if support level 1 is retested, and if it can hold. I very much appreciate this careful analysis of the technicals of the current situation, coupled with some fundamental factors for the market. The fundamental analysis raises serious doubts about whether a retest of the Nov. 20 lows can be successful. I would expect at least one more leg down to an intermediate term (or long term) bottom.

2008 Nov 24 11:34 AM

[Jim Hawthorne:]

Thanks for a very succinct and realistic article!

There is little doubt that the support level at around 775 is critical at present. Shorter term, the 805 level is also worth noting (remembering that support & resistance lines are better drawn with a crayon than with a sharp pencil!). A break and hold below 805 increases the probability of a rapid test of the November low sooner rather than later.

However, I also would draw your attention to tentative resistance at the about the 835-850 level, and note that after some serious effort, the bulls have had tremendous difficulty breaking through that barrier.

As you have observed correctly, fundamentals do not favor a sustained drive above this level, and it seems to me that downside risk remains much more potent than the lure of substantial reward. The support and resistance levels outlined above will tell the tale in the end.

My fear still trumps my greed. Still, I try to be prepared for anything!
Good luck to all!

Jan 24 11:35 PM

[D333GS:]

From a novice:
I am very happy to have found your work which I an now reading.

Super cycle !
Well ...At 682 on the S&P I guess the super cycle is confirmed.
A couple of questions if I may:

Is the supercycle a P/E Valuation cycle?

How does a $INDU P/E low in 1975 vs $SPX P/E low 1981 interact?

Looking at the S&P the Valuation cycle is aprox 30 years,in this chart
www.crestmontresearch....
P/E trough to peak looks like 1981 to 2000 . If this is a 30 year cycle and the peak is leaning fordward by five years , we should see a bottom 2011 aprox? The reason I ask is this article which places the middle of the cycle at the P/E peek and sees a bottom 2015 aprox
www.bmonesbittburns.co...

Will Gold signial something value wise?
stockcharts.com/h-sc/u...=$SPX&p=M&st=1...

Your Level 2 is also an important fib level 61.8 using 1980 as the base:
stockcharts.com/h-sc/u...=$SPX&p=M&st=1...


Thanks so much
John Francis

Mar 06 07:19 AM

[D333GS:]

Sorry , my StockChart.com links don't work here for some reason

Mar 06 07:23 AM

[John Lounsbury:]

John Francis - - -

There are many definitions of secluar market cycles and super cycles. I made definitions based of the relationships of successive highs and lows in primary market moves (20% or more). My general definitions of market cycles was given in:
seekingalpha.com/artic...

My review of super cycles was presented in: seekingalpha.com/artic...

Mar 06 07:44 PM