The Dow Report: When and why can we expect to see the October 2002 low violated?
By Tim W Wood CPA, October 3, 2003
Some analysts are calling the October 2002 low the 4-year cycle low. At this time, I do not believe that we can make this call with certainty. Let's now take a look at my reasons.
Going back to 1896 the 4-year cycle has averaged 47.08 months in duration. The last confirmed 4-year cycle bottomed in September 1998 at 7,400.30 on the Dow. The next 4-year cycle low was ideally due between August 30, 2002 and November 1, 2002. This window has now obviously past.
Because of the duration of the 4-year cycle, it can sometimes require extended periods of market action in order to confirm the 4-year cycle bottom. It is obviously very easy to look back in time and identify these bottoms, but how do you reliably identify a cycle of this duration in real time. Other than waiting on the future action of the market, I have found two tools that have historically worked great at identifying the 4-year cycle bottoms.
Paul F. Desmond's study on 90% days has proven to be an excellent indicator of 4-year cycle bottoms. I combined my study of the 4-year cycle with Mr. Desmond's 90% study and I found that with only 2 slight exceptions, all 4-year cycle bottoms since 1940 (this is as far back as this data was made available to me) have been formed with a series of 90% days as described in Mr. Desmond's research. Thus, the incorporation of this research has proven extremely useful as an early indication of 4-year cycle bottoms. You can visit Mr. Desmond's web site at http://www.lowrysreports.com
Another tool that has proven to be the most accurate as an early indicator of 4-year bottoms is Peter Eliades' CI/NCI indicator. CI stands for Cycle Indicator and NCI stands for Neutral Cycle Indicator. Peter states in his December newsletter, "There has never been an important market bottom in the history of the data going back to the 1920s with the CI/NCI ratio above 0.980 as it was in October 2002. You can visit Peter's web site at www.stockmarketcycles.com
Neither of these early warning indicators signaled the occurrence of the 4-year bottom in October 2002. October 2002 was the 49th month since the previous 4-year cycle bottom. So, given the fact that the ideal timing for the 4-year cycle has now passed, one of two things has obviously happened. One, either October 2002 was the 4-year low and these historically accurate indicators have not signaled the bottom. Or two, the 4-year cycle is extending and thus has not occurred.
Let's now look at my statistical findings. Out of 26 4-year cycles, 9 have extended past 49 months. That is 35 percent. Of the 4-year cycles that have extended beyond 49 months, these cycles averaged 56.44 months in duration. If this 4-year cycle has indeed extended, the next window of time for it to bottom is with the next seasonal low and that bottom is now ideally due between December 2003 and January 2004. That would take the 4-year cycle count out to about 63 months depending on the timing of the seasonal cycle bottom. This is not outside of the historical norm. The longest extension was 68 months, which was the 4-year cycle from July 1932 to March 1938. The 4-year cycle from April 1994 to September 1998 was 56 months. The 4-year cycle from August 1982 to October 1987 was 62 months.
Yes, I think we could possibly have an extended 4-year cycle on our hands and if so it is the current seasonal cycle that should carry us down into the 4-year cycle low. This means that the coming seasonal cycle would violate the October 2002 low, if this scenario proves to be correct.
Now, if October 2002 was the seasonal low, I would have to say that it was the weakest 4-year cycle low on record. This is based on the fact that the historical indicators failed to produce the technical signals normally seen at 4-year low. In any event, if October 2002 was the 4-year cycle low we can expect to see the current seasonal cycle decline hold above the October 2002 low. From that low a new seasonal cycle advance will begin. This advance should carry the market up for less than 6 months at which time that would mark both the seasonal and 4-year cycle tops. If this does occur, we can then look for the bear to take the stock market to new lows as we move down into the seasonal decline for 2004.
The Dow Jones Industrial Average closed the week at 9,572.31 up 259. 23 points for a weekly gain of 2.78%. The Dow Jones Transportation Average was also up 119.23 points closing the week at 2,783.06 for a gain of 4.48% for the week. The S&P 500 closed at 1,029.85, up 35.85 points for weekly gain of 3.60%. The NASDAQ composite was up 88.50 points closing the week at 1,880.57 for a weekly gain or loss of 4.90%.
Tim W. Wood
© 2003 Tim Wood