I try to keep an open mind when it comes to applying various forms of analysis to financial markets. I of course have my preferences: pure price and volume analysis while incorporating tools to evaluate momentum. However, there are many other tools at the disposal of a trader, some can be beneficial while others are often just variations of noise. While I do not heavily use cycle analysis in my research, it is something I keep an eye on.
I’ve mentioned the currently cycle several times on Twitter as well as a couple of blog posts…
On August 8th of last year I tweeted out this cycle was peaking. The S&P ultimately declined 5% before the post-election rally took hold. In January of last year I also tweeted about the cycle before equities dropped 11%. On April 21, 2015 I wrote an article for See It Market highlighting the cycle, stocks then dropped about 12%. And in 2014 I wrote a post, Is A Cycle Peak Coming Later This Year? Which was just before the S&P 500 declining a little over 7%.
I don’t bring these tweets and blog posts up to pat myself on the back but to show that I didn’t just make up this cycle yesterday by formfitting the data.
We are now at a point where the cycle is turning once again and with equities at/near (depending on which index you look at) new highs, the risk is to the downside. The amount of prior declines has not been bull market-ending but instead have been buying opportunities. Based on the strength in the breadth data, I don’t see a major argument why this time should be different – i.e. a 5-10% drop before buyers step back in. I’m not saying that’s what will happen, but that’s what’s taken place over the last several years when the cycle has topped or bottomed. We’ll see what Mr. Market brings in the coming weeks, but it appears the risk/reward is not overly favorable from a cycle standpoint.
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