-- Posted Sunday, 16 July 2006 | Digg This Article
After struggling recently under the weight of resistance, several major stock market averages closed at or near lows for the week on Friday, July 14. This poor performance underscores the pressure that the 4-year/8-year market cycle is bringing to the broad market and should be the prime market consideration for the next 6 weeks. We’ll examine the potential impact of this important market cycle in this commentary.
The tech stock sector has refused to confirm the rally in the Dow and the S&P (not to mention the small caps and mid caps) since the June lows and that’s not a good sign, internally. For any rally to stick it must be confirmed by the NASDAQ. It’s also important to see the Semiconductors leading the way or at least confirming. To date we’ve seen neither as the Amex Semiconductor Index (SIS) has made lower lows along with the NASDAQ 100 Index (NDX) in contradistinction to the higher lows made in the Dow, the SPX and the Russell 2000. This tech sector weakness is telling us to remain on our toes in the coming weeks as we head closer to the final "hard down" stretch of the cycle, which comprises the final week of July and the complete month of August.
Another important indicator that has told us to expect a top soon is the BANKMO indicator, which measures internal short-term momentum among the actively traded bank stocks. These bank stocks are the components of the Bank Index (BKX). On a rate of change basis they have failed to keep up with the broad market and have lagged conspicuously for several weeks. This is not a good sign for the overall health of the broad market in the interim as the banks should always confirm (if not lead) the market during rallies in order for the rally to have any staying power. The fact that BANKMO has a sideways-to-lower bias (as opposed to the upward bias displayed in other momentum indicators since June) effectively sends the message that the previous rally off the June lows didn’t have "legs" under it and was therefore suspect.
The benchmark resistance levels mentioned in recent weeks for the major indices have in many cases been reached but not exceeded on the upside. For instance, in the leading indicator S&P 400 Midcap index (MID) the 60-day and 90-day moving averages is where the near term resistance was expected to begin and so far has been the case at around 770-780 and the MID did end up testing the overhead 60-day MA resistance last week but has since pulled back and hasn’t been able to overcome it.
In the Russell 2000 Smallcap index (RUT) the 90-day moving average resistance is at 735 (RUT closed on Monday at 701, right below its 30-day moving average). In the NYSE Composite index resistance begins around 8,200 and extends up to around 8,250-8,300. In the NASDAQ Composite index resistance begins around 2,200 where the 60-day moving average intersects in the daily chart.
Market internals were decidedly weak in the past three days of the market’s decline. The number of stocks making new highs versus new lows on the NYSE is one of the most important of the internal measures and this ratio has been exceedingly weak for several weeks on end. At no point during the June-July rally did the number of stocks making new 52-week lows shrink up to less than 50, showing that latent selling pressure continued beneath the surface the whole time as the short-term cycle peaked last week and now the final hard down phase of the 4-year/8-year cycle is getting underway. On Monday the hi/lo differential was -7, on Tuesday -36, on Wednesday -55, on Thursday -126 and on Friday -196.
There were 220 new lows on Friday, July 14, the highest number since a month earlier on June 14 when there were 264 stocks making new lows. That was the exact day of the June low and was followed by a short-term rally to the most recent high at the 11,200 area in the Dow and the 1275 area of the S&P. So with a high number of new lows on Friday, coupled with the (temporary) climactic-type volume on the NYSE in the past three days (approximately 12:1 downside/upside volume ratio since Wednesday), might there be an oversold rally or lateral consolidation before the final "hard down" phase of the 8-year cycle consummates? It’s possible there will be a technical rally attempt, especially in view of the upcoming options expiration; however, any such rally should be looked at with skepticism as the picture painted by both the cycles and the market internals isn’t a positive one and likely won’t be until after the cycle bottoms.
On any oversold rally in the very short term it will be important to watch where the S&P 500 (SPX) meets with overhead resistance. The resistance begins at the 1260 area where the 30-day moving average intersects in the daily chart and continued upward to the 1275 area of the previous rally peak where the 60-day and 90-day moving averages both converge in the daily chart. The 30/60/90-day moving averages for the SPX have now taken on a downward tilt so it strengthens the odds of resistance being encountered on rallied until the 4-year cycle pressure lifts later this summer. Regardless of what happens we should expect there to be greater than average volatility as it normally the case during options expiration week.
Aside from weak seasonal and cyclical considerations, the 15-day moving average of the OEX put/call ratio, which called the top for us last week, will need to come down substantially before the next sustainable rally/bull market gets underway. As of Thursday’s close the 15-day MA of this important "smart money" indicator rose to 1.43. That’s a very high reading as any reading of around 1.40 or above is considered very bearish in the short-term. It will take a while for the ratio to decline and only after the smart traders stop shorting the OEX for a while. Until we see this ratio decline -- and until the new highs/new lows ratio improves substantially -- we are justified in assuming that bearish internal conditions still hold sway over the market.
Now let’s examine the past few 4-year cycle bottoms to see how the market normally acts in the final weeks before the cycle low is in. Remember, the upcoming 8-year cycle low scheduled for around the beginning of September is a function of the dominant 4-year trading cycle (a.k.a., the "Presidential Cycle"). This particular cycle, along with its variants in the long-term Kress 60-year cycle scheme, always bottom in either September or October of the year depending on when the closest 40-week cycle bottoms.
The previous 4-year cycle was in October 2002, at which time the 12-year cycle bottomed (the 12-year cycle being composed of three 4-year cycles). At that time the previous cyclical bear market was ending and the S&P, having made its initial low in late July, effectively doubled bottomed in early October of 2002. The NASDAQ, meanwhile, made a slightly lower low to form its 4-year/12-year cycle bottom that year.
The previous 4-year cycle was also an 8-year cycle low and was in 1998. We’ve already discussed this previous 8-year cycle bottom numerous times already so we won’t dwell on it again. Suffice it to say it was an extremely severe cycle bottom in that year, due partly to the deflationary global economic environment that held sway at that time, particularly in the area of foreign currencies and commodities.
In 1994 the 4-year cycle bottoming experience was an unusual one. This was because the 10-year cycle bottomed that year (as it always does in the third quarter of the fourth year of each decade). This, coupled with the fact that the 40-week cycle bottomed earlier that summer, created some powerful cross-currents that produced a rally in the S&P from July through August, followed by a sharp correction into early October when the 4-year cycle bottomed, then another rally to a lower high in October, and finally a steep decline in November.
In 1990 the 4-year cycle bottom saw the S&P make its low for the year in October in textbook fashion, followed by a post-cycle rally in November and December and which carried the S&P to a higher high by March 1991.
This year’s 4-year cycle bottoms with the 8-year cycle and there are now cyclical cross currents standing in its way as there were in 1994. That should make for a fairly pronounced bottom with most of the "hard down" concentrated in the six weeks ahead and especially in August.
Clif Droke is the editor of the daily Durban Deep/XAU Report, a technical forecast and analysis of several leading gold and silver stocks, including DRDGold and the QQQ available at www.clifdroke.com. He is also the author of several books, including "Stock Trading with Moving Averages."
-- Posted Sunday, 16 July 2006 | Digg This Article
