What Do The Cycles Say?

Daily State of the Markets Thursday Morning - January 12, 2012 Good Morning. Anyone who has read this column for any length of time knows that I don't believe in making predictions about the stock market. No, I believe it is critical to check your ego at the door each morning and to spend your time paying attention to what "is" happening in the market as opposed to what you think ought to be happening. You see, I learned a long time ago that Ms. Market doesn't give a hoot about what I think "should" be happening in her game or what "could" happen next. And it is for this reason that I do my darndest to avoid the use of the words "should", "could", or "would" in this business. This philosophy likely comes from the fact that I was influenced early in my career by the likes of Marty Zweig and Ned Davis. These two men were both rule-based investors who relied on their indicators instead of their gut feel, which can obviously run hot and cold (anybody remember Elaine Garzarelli or Joe "I'm the greatest" Granville?). While I am guessing that you're probably sick of hearing it, one of Mr. Zweig's almost off-handed remarks has stuck with me for the past 20+ years and is just as important today as it was back then. In the late 1980's Zweig said, "Investors who rely on a crystal ball will wind up with an awful lot of crushed glass in their portfolio." I bring this up (again) because (a) I happen to believe wholeheartedly in this concept and (b) what I'm about to review may sound an awful lot like a prediction. However, before we get started, let's be clear about one thing: I am NOT suggesting that one should invest according to cycles. No, I believe that the best way to succeed in the long run is to stay with your investing strategy/discipline and follow your rules. Although markets can make any set of rules or strategy look silly at times (2011 was a pretty good example), I truly believe this is the key to long-term success in the business of investing. With that said however, it is interesting to note that cycle analysis has a tendency to provide a very nice overview of what we might expect to see in the days and weeks ahead. I've found over the years that the combination of the rolling one-year, four-year, and ten-year cycles of the stock market is either a great guide to what lies ahead or... wait for it... utterly useless. But, before you click the delete button, when the cycle composite is "on" it tends to be dead on! One last caveat before we look at what the cycles say is I can't lay claim to the concept here. No, it was the fine folks at Ned Davis Research that originally put together a composite of the rolling one-, four- and ten-year market cycles and keep them updated each year. But since I've likely wasted enough of your time this morning by now, let's go ahead and get to it. In general, the cycles suggest that 2012 will have something for everyone. The early part of the year is projected to be choppy and with a modestly upward bias. To me, this looks like a continuation of what we've been seeing over the past few months. However, from there, things could get downright ugly as both the four- and ten-year cycles sport meaningful declines from about mid-March through the end of June. (The one-year cycle doesn't contain such a decline. However, the declines seen in the other two cycles simply overpower the one-year.) And from the looks of things, this could be a serious drop. The good news is that by the time the summer months begin to really heat up, so do the bulls as all three cycles, as well as the composite itself, sport serious rallies during the July through early-September period. How far the bulls run with the ball varies by cycle as the one- and four-year cycles suggest new highs for the year, while the ten-year shows a less energetic advance. From there, the usual seasonality looks to take over as the cycles project a less serious decline than that seen in the summer when the leaves start to fall, which is then followed by the traditional year-end rally. So there you have it. Sideways for a few months, a serious decline, a strong recovery, another modest pullback, and the usual rally into New Years. Any questions? As I stated above, the important thing to keep in mind when looking at this type of analysis is that when the cycles are "on" the market eerily follows the pattern. But once things go off the tracks, it can be quite some time before the market gets back in line. So, although all of the above needs to be taken with about a block of salt, I believe it is worth noting that we could see big swings in stock prices again this year. We shall see. Turning to this morning... U.S. futures had been up nicely in response to the much improved auction results seen in both Italy and Spain. However, this morning's U.S. data came in on the punk side, which has caused some profit taking. At this time, Wall Street is expected to open flat to modestly higher. On the Economic front... Initial Claims for Unemployment Insurance for the week ending 1/7 rose by 24,000 to 399K, which was well above the consensus estimate for 376K and also last week’s revised total of 375k (from 372K). Continuing Claims for the week ending 12/31 came in at 3.628M vs. consensus of 3.600M and last week’s 3.609M. Next up, the Commerce Department reported that Retail Sales were up just +0.1% in the month of December, which was well below the consensus for +0.4%. When you strip out the sales of autos, sales were down -0.2%, which was below the consensus for a reading of +0.4% as well as last month’s revised +0.3%. In addition, we will get a look at Business Inventories at 10:00 eastern. Thought for the day... What are you striving for? Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell... Major Foreign Markets: Australia: -0.11% Shanghai: -0.04% Hong Kong: -0.30% Japan: -0.74% France: +0.88% Germany: +1.19% Italy: +2.93% Spain: +1.42% London: +0.20% Crude Oil Futures: +$0.56 to $101.43 Gold: +$15.40 to $1655.00 Dollar: lower against the Yen and Pound, higher vs. Euro 10-Year Bond Yield: Currently trading at 1.940% Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +2.42 Dow Jones Industrial Average: +13 NASDAQ Composite: +2.95 Positions in stocks mentioned: None For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. 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