Market Cycles: A Look at the Historical Evidence

There are frequent references on this site to bull markets, bear markets, sucker rallies, bear-market rallies, dead-cat bounces, and the like. For example, a couple of days ago, the following appeared in a comment: “…the heartbreaking high-P/E bull-market-that-wasn't of 2003-07.” That’s not the first time I’ve seen the 100%, 5-year market expansion of 2003-2007 dismissed as if it never happened.

I have invited such contributors to define “bull market” for me, but almost no one replies. Two replies that I did receive were very thoughtful:

• thiazole said, “Bull market and bear market are just generic generalizations. Cyclical bull/bear market[s]…are based on economic cycles….Secular bull/bear market[s]…are also cyclical in nature and I believe they follow 17 year patterns as follows:
  1931-1948 Secular bear market
  1948-1965 Secular bull market
  1965-1982 Secular bear market
  1982-1999 Secular bull market
  1999-2016 Secular bear market
  You can have cyclical markets within secular markets of the opposite flavor. The early 90s saw a cyclical bear market inside a secular bull market and we are currently in a cyclical bull market inside a secular bear market. (Comment posted 7/31/2009; emphasis added.)
• Robert A. Weigand said, “Technically, there is no widely-accepted way to measure the legitimacy of a bull market….I would propose that a bull market is legitimate when buy-and-hold investors earn real stock returns that exceed the real return on bonds. The Mar. 2009 low of approximately Dow 6,500 took us back to 1996 levels (nominally), indicating a tremendous loss of real wealth for equity investors. When investors are better off in bonds for more than a decade, I'd say that's a "faux" bull. (Comment posted 8/5/2009; emphasis added.)

So, that’s one response suggesting that the markets run in 17-year cycles, another requiring a “better-than-bonds” run of more than 10 years. You have probably, along with me, seen references to 16-year cycles, 18-year cycles, generational cycles, and others. What’s interesting is how tightly some people become attached to these theories, as if their concept is the right one. That’s how a 5-year market increase of 100% can be dismissed as if it didn’t happen, or be sarcastically called a “sucker’s rally,” as if everyone who “fell for it” got slaughtered in the end.

But with all the different cycle lengths, everyone can’t be right.

Or can they? Have you ever heard of Fourier analysis? In 1822, the French mathematician Joseph Fourier discovered that simple sine waves can be used as building blocks to construct , describe, and approximate any periodic waveform, even if it is highly irregular. That is, any complex wave pattern--such as a stock chart--is simply the sum of a large number of routine sine waves of varying frequency and magnitude.

The process of deconstructing a complex pattern into its sine-wave building blocks is called Fourier analysis. It is used all the time in physical and electronic analysis. Years ago, in another life, I used Fourier analysis to measure the impact of vibrations and violent shakes on rocket components when they are subject to the enormous forces of blast-off.

I don’t intend to get mathematical here (to be honest, I’ve forgotten the mathematics). But on a conceptual level, the simple concepts of Fourier analysis can be used to evaluate the various cycles that impact the stock market. Using this approach, everyone can be correct—there are a multitude of cycles at work. So:

• Because we all know that the very long term direction of the market has been up (since, say, 1926), we can guess that there is a very long term cycle at work that tends to dominate the others over very long periods.
• The graph supplied by thiazole above (see his post for a link) suggests that there is validity to the 17-year cycle. The cycle is quite apparent in his graph.
• For the purposes of this discussion, let’s accept that there are 16-year, 18-year, and generational cycles at work too.
• And, since there are week-to-week, hour-to-hour, and minute-to-minute volatilities in the market, it is easy to see that there are many cycles of those durations also at work. In the news recently, flash trading programs have apparently been taking advantage of cycles with durations measured in seconds or fractions of seconds.

How do all these cycles interact? Waves are additive. For example, if you and a friend both throw pebbles into a pond, they will each generate ripples. As those little waves cross each other, they add up. If two ripples happen both to be going up when they cross, the total ripple height will exceed the height of either single one—the effects of the two waves reinforce each other, causing the water to rise higher than it would from either pebble alone. Similarly, if the two ripples are in opposite directions as they cross (i.e., one is pushing up and the other is pulling down), their effects will tend to cancel each other out—the water will remain flat in that spot at that instant. And finally, if the two ripples are both pulling down as they cross each other, they will reinforce down, creating a trough in the water that is deeper than either ripple would have made by itself.

Exactly the same effects occur if you toss in a pebble and your friend drops in a boulder. The observable result, of course, is that the boulder’s ripples completely overwhelm those produced by the pebble. But if you could measure finely enough, you would find that the pebble’s ripples are still there and causing their own little effects, just as described above. You just don’t see them very easily.

Let’s apply these principles to the market. If we accept that a multitude of waves—of many different lengths and magnitudes—are interacting to create the chart of, say, SPY or the S&P 500, we can deduce a few things:

• Even major cycles—say the 16-year cycle—can get drowned out by a larger cycle, or by the combined effects of other minor cycles that add up in the opposite direction. This helps explain the noise around the cycle itself.
• It is not helpful to get anchored on a particular cycle. While you’re focusing on, say, a long secular bear cycle, you might miss tremendous investment opportunities of shorter duration. In fact it’s inevitable. That’s why 2003-2007 was a truly investable bull market, even if it was surrounded by the crashes of 2000-2002 and 2008-2009. The total time period from 2000-2008 might be a bear, but the part in the middle was a bull. After all, the market went up 100% in 5 years. Call it a “bear market rally” if you like, but don’t call it a “sucker’s rally.” Those who recognized it and had logical exit strategies did just fine. They were not suckers. If you only think in terms of 10+ years, don’t project your framework and strategies onto everyone else.
• Primary trends and secondary trends become understandable. They are just different waves adding up to produce trends of an actionable magnitude and duration. What is “actionable,” of course, will depend on the individual investor’s risk profile, time commitment to the investing process, ability to process information, and other factors. One person’s investable trend will be something that escapes the attention or falls outside the investing principles of someone else.

This is why I cannot agree with the many posters on Seeking Alpha who are deriding the current rally, calling people investing in it “sheeple,” and predicting doom and destruction for participants. I am a participant, am profiting, and have logical exit strategies. Me and others like me will do just fine.

Disclosure: Long SPY, QQQQ, and IBM based on principles discussed here. Also long about 15 dividend stocks based on different strategies not discussed here.

Comments

[Robert Mart...:]

Investors can respectfully disagree when they have different assumptions about the same time frame. But when investors have different time frames and don't acknowledge it, they can't have a coherent discussion at all. That's why investors sometimes "talk past each other" without advancing the conversation.

As for calling other investors "sheeple," it's never profitable to disrespect the other side of the trade.

Thanks David.
Rob

Aug 06 09:16 AM

[j-dub:]

Wall Street's NEW reality 8/09


beginning of month = rally
end of month = rally hard
end of quarter = rallying too hard for words
California BK = fiscal rejiggering
Michigan next in line = never mentioned
CRE depression = REIT's explode higher
Housing JUNE sales edge higher = housing is rebounding(again)
GS front running trades = liquidity preservation
Banks own congress and the Fed = bank rally
consumer is insolvent = consumer is saving
mass layoffs = across the board earnings' improvement
earnings are not improving = earnings are beating street's expectations

STILL no jobs created= the consumer is temporarilly retrenching<br/>...
deflation = bull rally
expiration of unemployment benefits = unemployment is abating OR
contracting(either will do just fine)
Isn't our economy consumer based? = don't ask, don't tell consumer IS 70% of economy = rebound will be business based
low interest rates = good for stocks
high interest rates = great for stocks
collapsing dollar = buy stocks
rising dollar = not gonna happen
$10 frozen dinner = sure sign of recovery
CIT BK = HUUUUUUUUGE RALLY
CIT not yet BK = reason to be bullish
Bank failure Friday = stabilization
oil @ 50 = recovery is close
oil at $70 = recovery is incredibly close
oil at $90 = starting to recover
oil @ $110 = sign of increased consumer spending
oil @ $5 = boon for Joe Consumer
Gas @ $2 = tax break
gas @ $3 = mustard seeds for economic recovery
gas @ $4 = depression :)
Gas @ $1 = not in our lifetime
employment @ 10 % = better than expected
employment @ 11% = as expected
employment @ 12% = not unexpected
employment @ 13% = could have been expected
real unemployment right now @ 17% = never discussed
real unemployment @ 22% = market could correct from here stealing from our grandchildren = stimulus
stealing from our great grandchildren = "cash for clunkers is a huge
success"
government buying people cars = economy showing signs of life
economy is already dead = S+P 1000, DOW 10k
bear market rally = NEW bull market rally
no basis for NEW bull market rally = dis-included in pumper's handbook

10% unemployment
effects of socialism
depressionary states
higher taxes = THE NEW NORMAL
oppressive government
social unrest
decending to mediocrity


AND IF ALL ELSE FAILS(which probably will):

WWIII = TANGIBLE MANUFACTURING GREEN SHOOT

Aug 06 09:16 AM

[jkh307:]

Excellent post David. I agree 100 % with you. It is very important
for investors not to be 'locked in' to a certain time-length view of the
market. I lived and invested thru the 70's ... there were some TERRIBLE
markets then ... but there were opportunities for the 'long' investor as
well as the short investor. One had to pay attention. In my view ... what
has hurt many investors ... professional as well as amateur ... is that the
secular bull market from 82 to 2000 ... lulled many (most?) to 'sleep' and
'buy the dips' became the byword. Obviously ... that works pretty well in
secular bull market ... but not so well in a cyclical bull inside a secular bear.

Harry Dent uses cycles to predict many things. I recommend his books.
Again ... great post David ... thanks.
Jim Horner

Aug 06 09:29 AM

[chap08:]

I've forgotten my Fourier analysis too, but what I haven't forgotten is that nobody has found a profitable way of applying it to markets.

P.S. Careful about mentioning Fourier on SA - he was a Frenchman who is considered the father of the science of global warming. I suggest you change it from Fourier analysis to "Freedom analysis".

Aug 06 09:52 AM

[Moon Kil Woong:]

I respectfully would like to say that I believe that most bloggers, commenters, and readers are much more inteligent than the few that are pure bulls, bears, conspiracy theorists, and the like. I myself don't like the fundamentals of the market making some think that I'm a bear, but have held the belief that this up cycle was being generated by the popping of the US Treasury bond market and dollar depreciation. Thus I have held to this upside as a cash flow rally.

You are correct that the market moves as several waves on top of each other. In this case, the negative bias of the market is being twarted by a ton of cheap cash. Your idea of 16 year waves is interesting and reminds me of the decade analysis of others talking about astrology and the generation of this and that. Semantics aside, long term trends are valuable if you have a chance to see them. Usually those trends are clear only after it is a bit too late or, as you point out, make you miss all the little opportunities to profit on the way.

Although there are perma bears and spongebob optimists out there most people are level headed. Even if they are wrong, I learn quite a bit from their points of view. You can call it learning vicariously. Personally, I have learned a lot on seekingalpha especially on how organizations can game the system. Even if bears are wrong about a looming crash, as you yourself pointed out, fundamentally they could be correct. If the market trends down in the long term on those themes they voice, aren't they just wrong on the timing more than anything else? As Warren Buffet aptly pointed out, "you can never really know when the market will realize value" but most likely it inevitably will.

On that note, I will continue to avidly read seeking alpha and can't really afford to wait 16 years to see if I'm right or wrong.

Aug 06 10:02 AM

[justin_3d:]

As we speak this is second day in a role i see market open up and sell hard the first 30 minutes!

This is telling me something! This rally might have come to stop momentarily. We might get that pull back everyone is being asking about, or we might just consolidate here and then go up.

But right now the S&P 500 is at a key level right now! It's hitting a 38.2 retracement Fibonacci level!

For me this is a great level to of load some of my positions and maybe start shorting something. I will start by shorting the SPY! I want to see if it brakes this level or will it trace back down to the 90's! So shorting the spy at 100.50

Aug 06 10:09 AM

[Larry House:]

I don't understand or condone name calling at all--bull or bear. I am quite cautious in this market, but I don't short, and I don't want to economy to do poorly. Each of us is just trying to find our own approach to what is going on.

I put no credence at all to what has happened in the past. It is easy to write about history because we know it. Value guru Benjamin Graham stated that history in the market is NOT useful in predicting what will happen. It may make interesting reading, but it does not help us know what is coming.

Aug 06 10:21 AM

[RiskReturnO...:]

Perhaps the best approach is to take a balanced strategy incorporating the macro (16-18 year cycle, cyclical / secular bear / bull) perspectives and the extremely short term focus of fund managers who have to chase performance on a quarter to quarter basis vs. some index. I've got to believe that with a little common sense, and not having to be measured vs. some benchmark, the average investor can actually do better than the fund managers. For example, many of the laggard funds are buying now to "catch up" ... doesn't make sense, but it's how they play their game. The best strategy for retail investors is to profit from this through selling calls or taking profits at the expense of the weak portfolio managers.

Aug 06 10:41 AM

[thiazole:]

Of course, those of us who have made a lot of money using historical analysis would strongly disagree with Benjamin Graham. It is like technical analysis or fundamental analysis - many people pick one and say everything else is invalid. That is unfortunate since they have all proven their validity and when combined will only increase an investors accuracy. Also, here is the chart that was referenced in David's article: tinyurl.com/r4lntw
The wave function was roughly drawn.

On Aug 06 10:21 AM Larry House wrote:

> I put no credence at all to what has happened in the past. It is
> easy to write about history because we know it. Value guru Benjamin
> Graham stated that history in the market is NOT useful in predicting
> what will happen. It may make interesting reading, but it does not
> help us know what is coming.

Aug 06 10:48 AM

[thiazole:]

BTW, I believe that 2003-2007 was a fairly typical cyclical bull market rally within a secular bear market. It lasted a little longer than most and went a little higher than one would expect, but it didn't deviate that much from the norm. Look at the secular bear market from 1965-1982 and you will see quite a few cyclical bull markets that were similar in depth and breadth. Below are examples using the Dow:
Sept 1966-Dec 1968, ~30% rise
May 1970-Jan 1973, ~60% rise
Dec 1974-Sept 1976, ~72% rise

Looking at the above gains in the Dow, you might think this was a secular bull market, yet from 1965 to 1982, the market had a net zero nominal gain (and significantly negative after inflation gains).

Aug 06 12:31 PM

[whidbey:]

Did you have a point?

Cycles are useless or in any case determine little or nothing?

We, the unwashed, are happy that you are happy, but your review of cycles leads only the fact that you have your preferences and you follow them.

Too much public naval watching for most of us.

Aug 06 01:41 PM

[Lilguy:]

I'm with Whidbey on this one. If one wants to use cycles as a basis for investing, then one has to go out to those realllllly long-term ones, measured in centuries. And unless you do add up all those cycles simultaneously and do it right (LOL), you're unlikely to see gains in the market.

I think most of those involved in the stock market are just trying to figure out whether the market (or individual stocks more likely) will be up or down in their particular investment timeframe. For HFT computers, that's micro-seconds; for most day-traders, that may be a few seconds to a few hours; for longer-term investors, that may be a year or more (time to take advantage of LT tax gains); and, of course, some just buy & hold on the assumption that, over time, the stock(s) will do better than alternative investments.

So, like beauty, what the cycle is and where we are in it is all in the eye of the beholder.

Aug 06 04:29 PM

[thiazole:]

If you are investing in cycles, you buy recession bottoms during secular bear markets and sell a year or two later and if you are in a secular bull market, you just buy and hold long term. How complicated is that? Are you telling me that buying the recession bottoms during the 70s wouldn't have made you money? And are you telling me that if you had bought bought and held from the early 80s into the late 90s that you wouldn't make money? Why is it so hard to make money using cycles? Seems pretty easy to me...

Aug 06 04:40 PM

[Obi-Wan:]

Spot on about all the name calling. Generally, I believe that in psychology, they refer to that as "a defense mechanism for someone on the wrong side of an argument or line of thought."

There's always someone, somewhere on the wrong side of the market, and it will punish you handily if you think otherwise.

Aug 06 04:58 PM

[Tomcat101:]

1931-1948: Great Depression and a war. It's hard to be happy.
1948-1965: War's over. We make stuff. Birth of Rock n Roll. Everybody's happy.
1965-1982: Another war. Two big spending democrat presidents. Towel heads take away our oil. Big mess. Carter clueless.
1982-1999: Regan cuts taxes and is pro business. Everybody's happy and shopping at Wal-mart while Clinton gets oral sex in the White House.
1999-2016: No really, these internet stocks will go up forever, trust me. Bush takes office at the same time some people begin to realize that those internet stocks won't actually go up forever. Towel-heads wreak havoc on 9/11. Nobody happy. Bush defeats Frankenstein for a second term. Modest happiness and relief. People go shopping again. Knuckleheads use their home equity to buy stuff they don't even need. Even bigger knuckleheads give mortgages to knuckleheads with bad credit. Then knuckelheads realize other knuckleheads aren't making their monthly payments. Word spreads, game is over, market tanks. Nobody happy. It's all Bush's fault. Obama to the rescue. Market tanks a second time right after Obama takes office. Obama gives everybody free money to buy new cars and homes. Happiness returns.
2010. High taxes- Obama lied. Inflation. Gas $15/gal. Nobody happy. World War III. China defeats America. We all have jobs now making toxic toys and other junk, but at least we have a job. Many in the south have difficulty learning to speak Chinese and attempt to secede from the union again but are quickly defeated by the Chinese govt.
2017-2034: Civil War II ends. Everybody happy. New 17 year secular bull market.

Aug 06 10:20 PM

[TinyTim:]

"there is a very long term cycle at work"

It is interesting to note the constant upward linear trend line the long-term cycle (35 yrs) is superimposed in the thiazole plot. tinyurl.com/r4lntw

This upward trend is the main reason behind buy and hold.
Mistakes in timing will eventually be assuaged.

A look at the longer historical evidence poses the question-
When does the upward trend break?
Based on the past dynasties of Britain, Holland and Spain, it won't last forever. And unfortunately, there is little market data for comparison on the declines.

Hopefully, this isn't the end of the trend.

Aug 07 12:54 AM

[elcopone:]

Very interesting article. Thanks.

Aug 07 07:58 AM

[John Bowman:]

I have been receiving too many newsletters from prominent counselors to avoid "Buy and Hold" investing. Unfortunately, I believe this does not bode well long term for the economy.

The day trader philosophy of the dotcom era is becoming the New Normal.

Aug 07 08:37 AM

[YoYoMama:]

David, this is the best takeaway I get from your article:

"Call it a “bear market rally” if you like, but don’t call it a “sucker’s rally.” Those who recognized it and had logical exit strategies did just fine. They were not suckers. If you only think in terms of 10+ years, don’t project your framework and strategies onto everyone else."

Aug 07 08:58 AM

[MSimon:]

We are nearing the end of the microprocessor market. It started in earnest with the IBM PC (around 1982) and is beginning to peter out. Lots of easy profits for companies during that time. With no new equivalent technology (big gains, affects the whole economy) in the wings we are headed for a secular decline.

My estimation is that it will last until one of the small fusion experiments succeeds. (EMC2 in New Mexico, Tri-Alpha [Paul Allen of Microsoft has skin in that game], General Fusion in Canada).

If you want to get in early (the companies mentioned are all private for now) invest in superconductor technologies (used by all the small and large fusion guys except for General Fusion). Of course there is always the possibility that the whole idea of net energy fusion is a will of the wisp. However, superconductors are good for a lot of other things (electric motors and generators for ship drives) so that the upside potential is still there. Just not as large.

And David, no mention of the Z transform? ;-)

Aug 07 09:14 AM

[Jimbo:]

In spite of all the critical comments, I like your analogy of the waves created by pebbles versus boulders. This certainly seems to capture what I perceive happening in the market.

Aug 07 10:08 AM

[David Van K...:]

Thanks for the illuminating comments. I have a few followup thoughts and responses:
Robert: For weeks, I have been harping on the theme that you stated better than me: "...when investors have different time frames and don't acknowledge it, they can't have a coherent discussion at all. That's why investors sometimes "talk past each other" without advancing the conversation." Exactly.
jkh307: I think most investors, except perma-bulls, have gotten past the "buy on dips" tactic overall. That said, when you (think) you are in a bull market, it is an effective approach.
chap08: I worried about mentioning "French" too, but his name gives it away.
Moon: I also like to think that "most bloggers, commenters, and readers are much more inteligent than the few that are pure bulls, bears, conspiracy theorists, and the like," but reading some of the comments (and votes on the comments) sometimes makes me wonder. My theory is that there is a silent majority of people on SA that may not say much, but they are here trying to learn, make the occasional comment to help the discussion along, and avoid sarcasm, fear-mongering, and name-calling.
Moon: I worry about the fundamentals too, but commmon sense tells me that things have to get "less worse," or worse at a slowing rate, before they get better. We're in that stage right now. Whether it will advance to a stage when things are actually getting better is unknown. The elephant in the room is the boulder that the Fed government dropped in the pond with all the bailouts, tax withholding reductions, direct payments to SS recipients, etc. Its ripples are having enormous influence right now, and probably will for a few more months, but whether the intervention programs will lead to sustainable, organic private-sector growth is unknown right now.
Larry: I do put credence in the past, it's the best place I know to learn how people, institutions, and systems have reacted to various inputs. Circumstances change, but I think human nature remains relatively constant, or changes very slowly over generations. The past certainly does not dictate the future, but it may offer some clues if interpreted intelligently.
thiazole: Thanks for re-citing your 17-year cycle chart. I also like your terminology of saying that a trend (or market) of one flavor (bull or bear) can take place "within" a longer-term market of the opposite flavor. Exactly right.
TinyTim: Yes, thiazole's entire graph tilts upward. The market has been tilted upward as far back as 1926 (I distrust data earlier than that), despite significant deviations like the Depression era. Unfortunately, discussions about verrrrry long terms (like 100 years) strike me as of academic interest only, since they exceed the investment lifetimes of most individuals.
YoYoMama: Your pseudonym is on my Top 10 list of best screen names. From your comment, I take it that you are someone nimble enough to find a way to make money from bull markets that are less than 10-15 years long. As thiazole says, it's not that hard, is it?
MSimon: "Don't know much about [Z-transform]." I looked it up, and I still don't know much about it. "Don't know what a slide rule is for."
Jimbo: Thanks. Actually I didn't see most of the comments as critical. I learned a lot from many of them. As mentioned above, the big boulder right now is Fed intervention.

Aug 07 10:54 AM

[Steve20423:]

I agree with David. I think massive vibrations of rockets launching would be interesting study particularly at resonance. However, market cycles to investors simply result in buying (Opportunity) and selling(Capital Preservation). The other people who have short time frames are simply speculators. Forget about the market, buy companies and know their management their goals their story. Their story becomes your story as owner, it's your management. I am not sure the best wat to do all these things but Peter Lynch wrote If people bought stock like they buy houses they would rarely lose money. I don't plan to sell my house. It's 105 ft above sea level overlooking Buzzards Bay Impervious to the Ocean bulit on solid rock here in the East we are in the middle of a tectonic plate so earthquakes are remote possibility. The well produces over 60GPM It will likely remain in my family for generations. I try to buy stock the same way the way I Seek Alpha is with a trailing stop loss. Stick with a universe of well managed companies and after stopping out of a selection redeploy the cash to aniother asset that has the best expected ROI. Often I end up buying the same company for a lower price a few weeks later because better prospects don't (and they shouldn't) exist in the short if you've done the work. Longer term things change and that requires deeper analysis.

Aug 07 10:54 AM

[LouieK:]

The author David Van Knapp asks for a definition of a bull and bear market. Good question, and one I too have seen no one adequately define. Here is my take: There is some level of economic value to the economy and some trajectory it is following toward the future value. This is objective to the markets subjective assessment of that value and trajectory now. When markets subjectively underassess this objective value, then we are in a bull market and when markets subjectively overassess this objective value, then we are in a bear market. Concurrently, there is an interplay between the subjective assessments and the objective values and trajectory, so each of them affects the other and complicates the actual future outcome of the economy. Equity markets do not simply follow economics, they also have an impact on the economy (and its trajectory).

Aug 07 11:21 AM

[Kimball Corson:]

The market bottomed in March and 2Q GDP 09 came in positive. Coincidence? I think not. You are right on watching business cycles. The problem is the data come in a bit late and after the fact. Still, understanding cycles and how they coordinate with the market is very important. Congenital bears don't get it and usually miss out or hop in too late and get burned.

Aug 07 11:45 AM

[Go Lakers:]

The dumbest post I might have ever seen. Buy a John Deere machine, dig a hole and live in it. That will be the best place if what you describe comes to even remotely pass.


On Aug 06 09:16 AM j-dub wrote:

> Wall Street's NEW reality 8/09
>
>
> beginning of month = rally
> end of month = rally hard
> end of quarter = rallying too hard for words
> California BK = fiscal rejiggering
> Michigan next in line = never mentioned
> CRE depression = REIT's explode higher
> Housing JUNE sales edge higher = housing is rebounding(again)
> GS front running trades = liquidity preservation
> Banks own congress and the Fed = bank rally
> consumer is insolvent = consumer is saving
> mass layoffs = across the board earnings' improvement
> earnings are not improving = earnings are beating street's expectations
>
>
> STILL no jobs created= the consumer is temporarilly retrenching<br/>...
>
> deflation = bull rally
> expiration of unemployment benefits = unemployment is abating OR
>
> contracting(either will do just fine)
> Isn't our economy consumer based? = don't ask, don't tell consumer
> IS 70% of economy = rebound will be business based
> low interest rates = good for stocks
> high interest rates = great for stocks
> collapsing dollar = buy stocks
> rising dollar = not gonna happen
> $10 frozen dinner = sure sign of recovery
> CIT BK = HUUUUUUUUGE RALLY
> CIT not yet BK = reason to be bullish
> Bank failure Friday = stabilization
> oil @ 50 = recovery is close
> oil at $70 = recovery is incredibly close
> oil at $90 = starting to recover
> oil @ $110 = sign of increased consumer spending
> oil @ $5 = boon for Joe Consumer
> Gas @ $2 = tax break
> gas @ $3 = mustard seeds for economic recovery
> gas @ $4 = depression :)
> Gas @ $1 = not in our lifetime
> employment @ 10 % = better than expected
> employment @ 11% = as expected
> employment @ 12% = not unexpected
> employment @ 13% = could have been expected
> real unemployment right now @ 17% = never discussed
> real unemployment @ 22% = market could correct from here stealing
> from our grandchildren = stimulus
> stealing from our great grandchildren = "cash for clunkers is a huge
>
> success"
> government buying people cars = economy showing signs of life
> economy is already dead = S+P 1000, DOW 10k
> bear market rally = NEW bull market rally
> no basis for NEW bull market rally = dis-included in pumper's handbook
>
>
> 10% unemployment
> effects of socialism
> depressionary states
> higher taxes = THE NEW NORMAL
> oppressive government
> social unrest
> decending to mediocrity
>
>
> AND IF ALL ELSE FAILS(which probably will):
>
> WWIII = TANGIBLE MANUFACTURING GREEN SHOOT

Aug 07 01:11 PM

[John Lounsbury:]

David - - -

I like this article. Also like the comment stream. For those that are skeptical about the existence of cycles, simply look at multi-year moving averages. Cycles are absolutely undeniable. Reading cycles day-to-day and month-to-month is problematic because variations in news, sentiment, etc. put a lot of "little pebble" ripples on the long-term waves.

Cycles measured in market index performance charts have some variability in duration and magnitude, but do have a fascinating recurrence pattern. I wrote a series of articles on SA last year that made a set of logical definitions and then characterised the secondary, primary, secular and super-cycle moves in the Dow since 1900. All ten articles have links listed in the final one seekingalpha.com/artic...

Aug 07 01:23 PM

[Alphameister:]

David,

I liked your article very much and your individualized responses to comments even more. You left the ego out of cycle analysis, and that undoubtedly accounts for much of the name-calling. The same trader who will tell you, when it fits his predisposition, that a bull market exists when an index is above its 50-day average and both are above a rising 200-day average, will often find a way to rationalize that pattern away when other factors predispose him toward a bearish viewpoint.

I've been away from Fourier analysis for ages as well, but I know very well that the technical analysis I use to supplement my analysis of fundamentals is, in essence, a form of Fourier analysis. It can never be a bad thing to learn from history even if never repeats exactly.

Loved the comment by YoYoMama, and in reply to the comment by TinyTim, I must admit to being very worried that the super-long-term trendline to which he refers is at a tipping point. I have elected to place most of my investment assets in China, which I hope and expect is in the early stages of creating such a long-term uptrend.

Aug 07 02:08 PM

[User 458878:]

The series on market cycles last year that John Lounsbury referenced was a very comprhensive piece of work. It may be more detail than some want to wade through, but for detail nerds it is very good.

John didn't mention it, but he had an article last year that showed the cyclical nature of multi-year moving averages seekingalpha.com/artic...

Aug 07 02:09 PM

[SwingTimer:]

To properly appreciate the notion of cycles, simply add the notion of Reversion to the Mean to your repertoire - or, as some might say, the propensity of humans over time to repeatedly oscillate from an extreme of (optimism) greed to an extreme of (pessimism) fear. Cycles, of whatever duration, merely reflect the human character of investors.

Aug 07 02:16 PM

[Ricard:]

I see some serious flaws with using this type of technical analysis:

1) This seems to be mainly a rear-view-mirror type analysis that may find some value by going back and finding those very large boulders. Then, you may find people like Harry Dent were prescient in their calls for an 80-year cycle ending in 2009 (total sarcasm).

2) It will work fine in a 'frictionless' environment, but I think it's easy to posit that there is a LOT of friction in the stock market that will cause the waves (even large ones) to diminish over a period of time. The medium of transmission here is not air, or water - it is the human mind. Good luck on defining 'friction' there.

I generally believe that technical analysis in general should make up at most 10% of one's investing philosophy, if at all. This particular example can be long-term enough so that it doesn't conjure images of the dreaded 'sheeple'. But, generally, technical parameters favor short-term charting and strange terminology that seem more suitable for a Ouija board than investing.

Aug 07 02:29 PM

[Steve20423:]

I think you should borrw or at worst case rent the John Deere>
Holes are pretty Energy effiicent a little damp though> : )


On Aug 07 01:11 PM Go Lakers wrote:

> The dumbest post I might have ever seen. Buy a John Deere machine,
> dig a hole and live in it. That will be the best place if what you
> describe comes to even remotely pass.

Aug 07 08:54 PM

[Steve20423:]

I believe the Fed and Government intervention are prolonging the agony and the middle class and fiscally responsible will pay due to those actions.

What should happen is the inevitable reduction in size of the US auto industry a result of the slowing growth in America and many competitors, a wholesale exchange of real estate from the defaulting owners to now responsible renters who should be able to buy those properties for 25-30 cents on the dollar. Sure that would hurt my own home equity position for a number of years but that's paper pain unless I am forced to sell. But that won't happen because the fed fears deflation. I fear the dilution of my dollar.
Should we be buying Silver??

Aug 07 09:07 PM

[Erick Tippett:]

Mr. Van Knapp,

Congratulations on an excellent article. Most investors and sub-
scribers to this web-site (seeking-alpha.com) should read and
re-read its several times, I certainly will. I wish I had this kind of
informational knowlege ten years ago, it could have made a
world of difference in my investing experience which has been
fairly profitable, but would have been much better with the input
you've provided here.

Unfortunately, so many have the tendency to ignore points of view that differ from their emotionally held beliefs and will no doubt find a way to ignore or invalidate your excellent educational presentation.

As Robert Prechter has said, people we be what they will be and
find emotionally based reasons to support that.

Again thankyou for the information.

E. Tippett
Chicago, Illinois

Aug 07 10:50 PM

[mearf:]

Pattern recognition and decomposition models, such as Fourier analyses of harmonic motion, assume a process with reasonably well-behaved forcing and damping functions. Unfortunately, our economic/market cycles usually have irregular forcing and damping functions. It’s sort of like throwing random size rocks/boulders at unpredictable times, and observing and analyzing subsequent wave patterns to predict future patterns, at least until the next huge boulder is thrown.
The continual introduction of new factors (rocks/boulders) such as in global markets, emerging technologies and government/business responses, will change the ‘wave patterns’ in terms of amplitude, frequency and interaction. This produces a lot of distortion/noise which cause great uncertainties in the processing of prior information, but more importantly in predicting future outcomes in both short and long term.

Aug 08 02:48 AM

[Niner:]

Yes he had a point. Many people can't see the forest for the trees. Or, perhaps in this case they can't see the trees for the forest.

Many investors become so concerned with the big picture they fail to see smaller positive opprotunities within the larger negative trend. Little cycles inside bigger cycles.

I don't care if the current up trend is a dead cat bounce, a suckers rally or the beginning of a new bull. It has been a very profitable cycle within a cycle.

On Aug 06 01:41 PM whidbey wrote:

> Did you have a point?
>
> Cycles are useless or in any case determine little or nothing? <br/>
>
> We, the unwashed, are happy that you are happy, but your review of
> cycles leads only the fact that you have your preferences and you
> follow them.
>
> Too much public naval watching for most of us.

Aug 08 09:39 AM

[Niner:]

I feel "out of my league" here. I really enjoyed the article and the quality comments(unlike the comments in the regular blog).

Aug 08 10:00 AM

[grh1212:]

Bravo,j-duh. You have nailed the PC commentary from the news industry, especially from the financial reporting. Who dictates this single voice in the respectable media? Cheers.


On Aug 06 09:16 AM j-dub wrote:

> Wall Street's NEW reality 8/09
>
>
> beginning of month = rally
> end of month = rally hard
> end of quarter = rallying too hard for words
> California BK = fiscal rejiggering
> Michigan next in line = never mentioned
> CRE depression = REIT's explode higher
> Housing JUNE sales edge higher = housing is rebounding(again)
> GS front running trades = liquidity preservation
> Banks own congress and the Fed = bank rally
> consumer is insolvent = consumer is saving
> mass layoffs = across the board earnings' improvement
> earnings are not improving = earnings are beating street's expectations
>

Aug 08 08:32 PM

[Voice of co...:]

The market will be wherever government sachs and the rest of the urine street thieves want it to be.

Aug 08 10:06 PM

[GC39:]

I am happy having now a friend in mind on Seeking Alpha.

Aug 09 05:52 AM

[Robert Mart...:]

Moon Kil Wong:

I just read your thoughtful comment above:
seekingalpha.com/artic...

This is one of the healthiest attitudes I have ever heard about different time horizons. The Internet needs more folks like you who put a premium on respectul disagreement.

Well done.
Rob

Aug 13 01:46 PM

[ARH:]

I have a question about economic indicators and how the economy is looking as of now:

What are the signs/steps to an economic recovery in the eyes of economic indicators? Im looking for something to the effect of- "first supply goes up (shown by this indicator), then people work more hours (shown by this indicator), then companies hire more (shown by this indicator)...". Im most concerned with unemployment rate; continuous claims; total workforce; change in manufacturing payrolls; u6 data; average earnings month over month (yr over yr) (week over week); and other indicators/reports of the like. And in terms of that, how is the economy looking now?


thanks
-
A

Aug 13 01:49 PM

[David Van K...:]

ARH:

Just saw your question, hope you see this answer.

A good place to start is with the Conference Board's Index of Leading Economic Indicators. While they sell most of their data, they also enjoy publicity, and you can learn a lot just from their press releases. They just released a new report on the US yesterday, and their index went up for the 4th straight month, which was widely reported. It suggests the economy is recovering. The press release details the 10 indicators they use in compiling the index. See it here: www.conference-board.o... .

Aug 21 09:01 AM