In just a few more weeks the latest six-year cycle will peak. What happens to the financial market in the weeks and months immediately following this important event will be partly determined by the response of the Fed. But in the longer-term scheme of things, even the Fed is powerless to stop the events that will increase in intensity beginning next year and into the year 2014.
In this article we’ll examine how the six-year cycle influences the financial market outlook in its relationship to the longer-term cycles. Although the six-year cycle is one of the smallest of the yearly Kress cycles, it is by no means irrelevant. Despite its diminutive size it typically packs a wallop, especially when the nearest long-term cycle is in its declining phase, as is the case this year.
Let’s take a look at the last few peaks and bottoms of this cycle. In 2008, when the six-year cycle descended with a mighty crash, it nearly brought down the entire global financial market. The final “hard down” phase (i.e. last tenth) of the previous six-year cycle in 2008 was also exacerbated by the subprime mortgage crisis. From this we can surmise that the six-year cycle has a much larger impact when the financial market’s internal bias is to the downside. Yet even this downward bias is the product of the long-term cycles which comprise the Kress 120-year cycle. These long-term cycles have been mostly in the declining phase since 2000, with the final “hard down” phase beginning in 2008.
The effect of the previous six-year cycle bottom in late 2002 was doubled by the simultaneous bottom of the 12-year cycle that year. You may recall that 2002 was the year that witnessed a great bear market in Internet and tech stocks. The lifting of the cyclical downside pressure associated with the six-year cycle in late 2002 led to an equities market in rebound in 2003 and beyond, showing the power of this particular cycle.
There are two conclusions which can be drawn from our study of the six-year cycle thus far. The first is that whenever it bottoms, it always has a material impact on equity prices unless the yearly cycle of the next highest degree is rising (which mitigates the downward force of the bottoming six-year cycle). This explains why the market was able to keep rising after the year-year cycle peaked in 2005, because the 10-year and 12-year cycles were still rising.
One notable event that occurred in 2005 during the peaking of the six-year cycle, however, was the London bombings on July 7 that year. Six years later, during the latest six-year cycle peaking phase, we witnessed yet another violent outburst in London, this time in the form of rioting that took place between August 6-10. Also in July this year we witnessed the Oslo, Norway, bombing and shootings. We’ve seen that there is a correlation between peaks and bottoms of the six-year cycle and stock market turning points. Could there also be some correlation between six-year cycle peaks and violent behavior? I leave that for future research to decide.
In the case of the six-year cycle peak of late 1996, the powerful 30-year cycle component of the 120-year Master Cycle was still rising. This in turn propelled stocks to higher highs until the 30-year cycle peaked in late 1999 – a year which also witnessed the six-year cycle peak and was followed by a bear market in 2000 and beyond.
By contrast, in those years in which the next cycle of highest degree is falling, the bottom of the six-year cycle will exert a decidedly negative impact on stocks. In 1990, for instance, the six-year cycle bottomed later that year along with the 12-year and 24-year cycles. Because these two larger cycles were in the final “hard down” phase heading into 1990, it came as no surprise that 1990 witnessed a bear market along with 271 bank failures.
The chart below depicts the six-year cycle in its peak and trough phases from 1984 and beyond. The final six-year cycle components of the 120-year cycle, after peaking in a few weeks, will bottom in late 2014.
Click to enlarge
The year 1993 also witnessed a peak of the six-year cycle. Although the Dow Industrials did peak in late September/early October along with the cycle and declined into late October, the worst of the damage didn’t occur until a few months later in the winter and spring of 1994, during which time the 10-year cycle was in its final “hard down” bottoming phase.
The infamous year 1987 also witnessed a peak of the six-year cycle which occurred around the time of the October ’87 stock market crash. The October ’87 market crash was arguably the most textbook example of a six-year cycle peak and its direct impact on stock prices in recent memory. The market imploded on October 19, 1987 – just a couple of weeks following the orthodox peak of the six-year cycle.
In light of this brief overview of the six-year cycle, investors should exercise caution entering the October period of the latest peak of the six-year cycle, given the market’s historical tendency to underperform following this cycle’s peak.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.