A Cycles Deep Dive
Which Cycle is the Market Following?
Today we’ll review market conditions and then do a deep dive into cycles.
Market Conditions
The market suffered a three-day decline until it was saved by NVDA earnings after the close this past Wednesday. From there, NVDA sparked a rally in the tech sector and the greater markets globally. The speed of the reversal was impressive, however it had limited participation and left the markets overbought.
Referring to the chart below you can see that:
The market is following the 21 EMA at the moment as it bounced from this moving average on Thursday,
Price is extended from the 21 EMA already so further upward movement may be hindered,
A break and close below the 21 EMA would signal a change of trend,
There would be strong support around $474, the Volume Profile Point of Control & 50 Simple Moving Average,
The BBWP indicator shows that a period of increased volatility (up or down) is about to occur,
The McClellan Oscillator shows slight breadth improvement but is surprisingly little given the magnitude of the move over the past 2 days,
There are still Net New Highs, so it’s still a bullish environment.
On Friday the market had some profit-taking into the weekend. On the 30-minute chart, the SPY gave back some gains and is forming the start of a rounding top. We’ll have to see if buyers come back on Monday.
Friday seemed a bit risk-off with non-tech sectors leading the way.
What is even more suspect is the fact that Consumer Defensives was the leading sector last week, even taking into account the NVDA effect. This is not screaming a “risk-on & go 100% in equities” type of rally. If anything, it is hinting that we are getting late in the uptrend and a pullback is near.
Looking at the Retail Only Put/Call Ratio, retail currently owns a lot of call options. Let’s see if the market will pay Retail this time and continue to trend higher or reverse to spoil their plans.
Finally, you could see some profit-taking by both the Smart and Dumb Money.
All the conditions we covered point to caution. We conclude that the uptrend is still intact, however, some slowdown is possible until price catches up to the 10/21 EMAs. If there is a change of trend, it will begin with a break of the 21 EMA.
Cycles Comparison
We often discuss the Presidential Cycle as it is currently the cycle that best fits the price action. The “Sitting President Running” (green) forecast captured the strength of the market. However, this is pointing to weakness starting in early March that could last until late March, before a strong April.
Cycles Edge Static Cycles: Our Cycles Composite (blue), Energy Cycle (pink) and Seasonal (green) cycles point to weakness starting for the S&P 500 around 3/3, which could last until 3/29, before a Spring rally.
Dynamic Cycles: To find Dynamic Cycles one could use Timing Solutions software to see which cycles are relevant, or one could simply draw cycle brackets on the chart. In a prior post, we mentioned that the S&P 500 seems to be following a combination of the 27, 40, 52, 80, and 110 bar (trading day) cycles. Using cycle brackets we can see that the SPY is following the 110-bar cycle as depicted below, hinting that cycles are elongating (probably from AI FOMO). Often there is a selloff towards the end of the cycle bracket, so expect some weakness starting mid-March and a bottom around 4/7 according to the dominant Dynamic Cycle.
We cover these three cycles often, but today we’d like to focus on other cycles.
Gann Master Cycle: The Gann Master Cycle created by W.D Gann points to some softness coming into the market, which should bottom around 3/9 before starting a spring rally.
Kondratieff Cycle: The Kondratieff cycle, was discovered by Russian economist Nikolai Kondratieff in the 1920s. This theory suggests the existence of long-term cycles in economic activity, lasting 40 to 60 years (typically 54 years) linked to major technological innovations and their subsequent diffusion throughout the economy. The Kondratieff Cycle appears to have predicted the coming of a new transformative technology — Artificial Intelligence. According to this cycle, the AI Wave may continue to bolster the stock market until mid-July 2024 before slowing down.
Decennial Cycle: The decennial cycle, also referred to as the 10-year cycle or decadal cycle, highlights a recurring pattern observed in economic and financial phenomena over approximately 10-year intervals. This cycle suggests that economic variables and market trends exhibit consistent behavior every decade. This cycle could have captured the pattern of the stock market without the Artificial Intelligence theme which is currently powering the market higher. It may be pointing to weakness in non-tech sectors.
Kuznets Cycle: The Kuznets Cycle, named after Nobel Prize recipient Simon Kuznets, spans approximately 15 to 20 years (typically 18.3 years). Kuznets identified this cycle and attributed it to investments in housing and building construction.
Applied to the S&P 500 it forecasts a top in March, followed by downside pressure. It could be possible that this downward pressure applies to real estate and construction. Note that homebuilding stocks have been hot due to expectations of a Fed rate cut this year, but REITS (XLRE) have been underperforming this year.
Juglar Cycle: The Juglar cycle, named after French economist Clément Juglar, represents a medium-term economic cycle with an average duration of approximately 7 to 11 years (typically around 9.2 years). It is also known as the "fixed-investment cycle" or the "investment cycle." This cycle points to a top occurring now.
Kitchin Cycle: The Kitchin Cycle, discovered by Joseph Kitchin in the 1920s, approximates a period of approximately 40 months (3.33 years). The Kitchin Cycle is often referred to as the "inventory cycle" and focuses on fluctuations in inventory levels. It is primarily associated with changes in production and inventory accumulation by businesses. It suggests that there are periodic waves of inventory build-up and drawdown that significantly impact economic activity. This cycle points to a top around 3/15.
Metonic Cycle: The Metonic Cycle is based on the Lunar Calendar. This cycle seems to have called the melt-up price action of the S&P 500. However, it points to a top around 7/18, which seems to coincide with the Kondratieff Cycle.
These cycles point to some softness in March and a possible pause in the AI Tech Boom in July. For Paid Subscribers, we’ll look at these new cycles from 2020 to 2030.
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.