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What Do The Cycles Say About 2015?

Daily State of the Markets
Tuesday, December 23, 2014

With the Dow and S&P 500 now back at all-time highs (albeit by the skinniest of margins), and traders apparently following the seasonality play book, the question of the day is, where do we go from here?

The first item of note is that although both of the blue chip indices did in fact close at all-time highs yesterday, neither was able to "break out" above the intraday high-water mark set earlier in the month. In addition, note that the Russell 2000 is now back to within spitting distance of its record high set back in July. And with the NASDAQ and Midcap indices not yet to The Promised Land, the technicians tell us that there is some resistance overhead - and that the bulls still have some work to do if they want to claim that another new up leg has begun.

S&P 500 - Daily

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However, the good news is that the uptrend line that can be drawn from the October and December lows looks fairly healthy and the price action on the weekly chart of the S&P continues to move from the lower left to the upper right. So, while the bulls have been tested a couple times lately, our heroes in horns do appear to have possession of the ball.

S&P 500 - Weekly

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Which brings us back to the question of the day, where do we go from here? The bears argue that momentum has been unimpressive for much of this year and that given the age of the current bull, the move is looking old and tired.

However, it is important to remember that bull markets do not usually die of old age. No, the stock market is really the manifestation of the investing public's view of the world going forward. And with the economy improving, rates and inflation staying low, earnings at record levels, and the Fed intent on not blowing up the recovery, things look pretty good here in the good 'ol USofA right now.

So, with both teams apparently having a decent argument, it is probably a good time to check in with our cycle composite in order to get a feeling for what 2015 "might" look like.

What Do The Cycles Say?

But before we get to the projection of the cycle work, we are once again obligated to offer up some disclosures/disclaimers regarding the proper use of stock market cycle analysis. The bottom line here is simple: The review of cycles should NOT be used in a vacuum or as a stand-alone indicator. Using only the cycle projection, or any other indicator for that matter, to guide your investing decisions is a fool's game.

With that said however, we continue to review what the cycles suggest might happen on a daily, weekly, and monthly basis. In fact, this data continues to be an important input into our daily and weekly Market Environment models.

What Is a Cycle Composite?

For anyone new to our periodic analysis of the cycles (the closest thing we have to a crystal ball), the cycle composite is a combination of the one-year seasonal, the four-year Presidential, and the 10-year decennial cycles - all going back to 1928.

By combining these three cycles, the cycle composite is produced. And while expecting the market to follow the cycles exactly is just plain silly, it is surprising how often the market tends to follow the general direction of the composite - especially when viewed from a long-term perspective.

Where Are We Now?

Recall that the stock market has followed the 2014 cycle projection almost to a "T". In fact, the price of the S&P 500 resides almost exactly at the same spot as the cycle projection today. An amazing feat.

To be sure, the ride has not been smooth and the S&P has indeed strayed from the projection - sometimes substantially so - at times. However, the key is that the composite was an excellent guide to 2014.

Oh, and before moving on to the outlook for 2015, we should note that the cycle projection for the rest of this year is a one-way street - to the upside.

Looking Ahead to 2015

One could not be blamed for looking ahead to 2015 with caution. Stocks have been running higher for 5.75 years. While the economy is strong, valuations are full. Interest rates are likely to rise at some point next year. And this is now the 3rd longest stretch in history without a bear market decline.

But here's the good news. 2015 is a year that ends in 5. 2015 is the third year of the Presidential cycle. And believe it or not, the cycle projection for 2015 looks pretty darned strong.

The chart below shows the cycle "mashup" or composite for 2015 (the red dashed line) and the S&P 500's actual movements from the beginning of 2014. First, note that the red line uses the current cycle projection for 2015 - not the one developed for 2014.

The next thing to note on the chart is the black vertical line drawn at the end of the blue line. This marks the beginning of the projection for next year.

In looking at the red line, one can't be blamed for breaking into a broad smile. With the exception of some waffling in the spring and fall, the rest of the year is projected to be, well, straight up!

Because the projection is SO lopsided toward the bulls, it is probably a very good idea to take the composite's prognostication with a grain of salt. In other words, it would be irresponsible to expect the market to follow this pattern.

However, stranger things have happened in this game and we thought that you should at least be aware of what the cycles are saying about the New Year.

Speaking of the holidays, please note that I'll be taking some time between now and the start of 2015 to recharge the batteries and be with the family. As such, the morning missive is likely to go missing a time or two (okay, maybe three or four times) over the next two weeks.

Happy Holidays to all!


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Turning To This Morning

Oil is moving higher and OPEC expects prices to be back above $70 by the end of next year. There is no news to speak of out of Russia. Stocks are up in Europe. And the final revision to U.S. GDP came in with a 5-handle. So, while China's stock market took it on the chin, stocks are up in Europe and the market is looking to open higher here in the U.S.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
Japan: Closed
Hong Kong: -0.32%
Shanghai: -3.02%
London: +0.32%
Germany: +0.27%
France: +0.81%
Italy: +0.64%
Spain: +0.39%

Crude Oil Futures: +$0.73 to $55.99

Gold: -$1.80 at $1178.00

Dollar: higher against the yen and pound, lower vs. euro

10-Year Bond Yield: Currently trading at 2.170%

Stock Indices in U.S. (relative to fair value):
S&P 500: +9.36
Dow Jones Industrial Average: +87
NASDAQ Composite: +17.93

Thought For The Day:

We are what we repeatedly do. Excellence, then, is not an act, but a habit. -Aristotle

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

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