The Dow Report: Conventional Wisdom
By Tim W Wood CPA, October 6, 2006
In today's observation I want to take a look at a few of the mainstream views that were so prevalent just a few months ago. The first one that comes to mind is the expectation of $5 per gallon gasoline. I remember hearing this on the news and friends and family were talking about it. Right as gasoline neared it’s peak, one night in a restaurant I recall hearing a conversation in which a man was telling his friends all the reasons that gasoline was going to go to $5 per gallon or even higher. When I heard that conversation, I knew we had to be nearing a top. The week of July 14th my intermediate-term Cycle Turn Indicator turned down telling me that the advance was over. As of this writing gasoline has dropped some 35% on the futures market and in my area it has dropped 28% at the pump. Below is a chart of gasoline showing this decline. I have been saying now for a couple of weeks that gasoline is oversold on an intermediate-term basis and that we should be moving into an intermediate-term low. That low is still trying to form. If it can take root and a full blown intermediate-term buy signal occurs on the Cycle Turn Indicator, then we should see another advance develop. At this time, I believe that advance will be a counter-trend move and I will treat it as such unless I see evidence developing to the contrary.
The same also goes for oil. I specifically recall just a few months ago that it was the opinion of most people that oil was headed to $100 a barrel or even higher. I remember seeing this on my local news, CNBC and even friends and family talked about $100 oil. Well, since the peak of all that talk oil has dipped below $58 a barrel from just under $80. Here too, oil is now getting pretty oversold. Once the intermediate-term Cycle Turn Indicator turns up, we should also see a counter-trend bounce unfold here as well. In the meantime, I cannot yet rule out the possibility of a bit more weakness. However, we should be getting relatively close to a window in which an intermediate-term bounce should have the opportunity to take root. At this time I believe this will be a counter-trend affair. Should evidence to the contrary develop, once a bounce takes root, then perhaps $100 oil will be possible, but for now I seriously have my doubts. We just have to take it one step at a time at.
Right as gold was moving into its peak back in May I recall hearing that it was on its way to $1,000, $2,000 and even $3,000 per ounce. Long-term, I too believe that such price levels may very well be achieved, but I have also maintained that such advance would likely come with the next 9-year cycle up and not this one. Anyway, to get back to the point here, it seemed that just as with gas and oil, as gold approached its peak it had pulled the majority into thinking that it was going much, much higher and that the advance had only just begun. At the time all I knew was that the week of May 19th my intermediate-term Cycle Turn Indicator told me that gold had rolled over and that lower prices were to be expected. Again, this was contrary to "Conventional Wisdom." From the May high down to the recent low, gold has dropped by some 23%. More recently, last week to be exact, I said that there should be at least one more trip back down before an intermediate-term cycle low was made in gold. Just as with oil and gas, there is an intermediate-term low coming. I'm now waiting for the evidence to tell me if we have seen that low just yet or not. Once the low is confirmed we will have an intermediate-term advance on our hands and I will have to monitor that advance to see how it develops.
In regard to housing, I also specifically remember last year when the talking heads and realtors were telling us that housing was not in a bubble. Living on the Gulf Coast I watched housing prices soar and the building boom was wide open into 2005 and 2006. Yet, my intermediate and even my long-term Cycle Turn Indicator turned down back in mid-2005 telling me that a decline was imminent. Since then we are seeing inventories continuing to grow and sales have virtually stopped. In my area builders are giving away appliances, big screen televisions and even $10,000 cash bonuses to buyers. Now we are seeing these huge inventories beginning to pressure prices. In Daytona Beach, FL, D.R. Horton (DHI) has dropped the price of homes in some of its developments by as much as 26%. "Conventional Wisdom" was not telling people a year ago that this would happen. I have posted a chart of the Housing Index below.
As for the stock market, "Conventional Wisdom" was calling for a 4-year cycle low in October. Everyone was looking to the dreaded months of September and October. Well, we get into September and the market advanced higher. Then, "Conventional Wisdom" was that the June/July lows marked the 4-year cycle low. Since very early in 2006 I have been telling subscribers that the odds were that the 4-year cycle low would not come in the fall of 2006 as most anticipated, but rather in 2007 in a bit of a stretched 4-year cycle.
Now we have the money coming out of commodities and it is looking for a home. At least some of that money is indeed moving into stocks. This has in turn chased the shorts that were positioned for the anticipated September/October 4-year cycle low out of the market. These cash inflows are just the catalyst to stretch the 4-year cycle. As a result the euphoria is running high and in turn "Conventional Wisdom" is that we have dodged the bullet in the stock market and that we now have clear sailing. This is sucking everyone in just like the advance into the highs in gold, gas, oil and even housing did. The fact is that my intermediate and even long-term Cycle Turn Indicators remain bullish on the stock market and have since the Summer rally began. As a result we do not yet have a top, so yes, the picture is still bullish. I will go on to say that given the money that is moving into the market combined with the euphoria, positive Cycle Turn Indicators and an election ahead of us, conditions remain right for still higher prices. I will also add that I did call the low coming out of the June/July lows and at that time I said that the "Summer Rally had begun." In fairness I will also add that in early September I began to get gun shy and I honestly did not expect to see the 2000 high bettered. Nevertheless, it happened.
But, here is where I believe "Conventional Wisdom" has it wrong once again on the stock market. While everyone is thinking the 4-year cycle low is now behind us, I find absolutely no evidence to support that view. This is not to say that the market can’tstill move higher because it absolutely can and the Cycle Turn Indicators are confirming that. However, the decline into the 4-year cycle low still lies ahead, but at present I see no evidence that the top has occurred. Below is a chart showing a few of the more recent 4-year cycle lows. The indicator plotted in green is my monthly Trend Indicator. In going back to 1896 I have found that this indicator has turned down below its trigger line at every 4-year cycle low. It can on occasion turn down at significant sub-cycles within the 4-year cycle low as well. We saw this in conjunction with the April 2005 low, which was a mere 30 months into the 4-year cycle low and that did not mark the 4-year cycle low. Again, this indicator has always turned down at every 4-year cycle low since 1896 and this is just one of the many pieces of data that does not support the "Conventional Wisdom" that this past June/July marked the 4-year cycle low.
Let me add that since 1896 the average decline of ALL 4-year cycles has been 31.52%. The least decline ever into a 4-year cycle low from the intra-day top down into the intra-day low was 12.04% and this occurred with the decline into the 1994 4-year cycle low, which was obviously part of the greatest bull market ever. The second shallowest decline into the 4-year cycle low occurred with the drop into the 1953 4-year cycle low and there the decline was 13.79% on an intra-day basis. I might add that this occurred during the second greatest bull market ever. In the current case, the decline from the May 10th high at 11,670.20 down into the July 18th low at 10,683.30 was a mere 8.46%. Now I have to ask, "Is it logical for us to be sitting in the 48th month of a cycle that averages 47 months in duration, with an indicator still positive that has turned at every 4-year cycle top since the inception of the Dow Jones Industrial Average, along with the non-confirmations we are seeing by numerous other averages that the recent decline of a mere 8.46% actually marked a 4-year cycle low?"
If you are interested in a statistical and technical based source that also utilizes Dow theory and provides statistical probabilities as to what should occur, then Cycles News & Views may be for you. I also provide web-based updates giving specific short and intermediate-term turn points on the stock market, gold, bonds and the dollar, utilizing my Trend and Cycle turn Indictors. The Trend and Cycle Turn Indicators keep us on track with specific turn points and guide us in regard to our longer-term forecasts. The October issue is now available and in it I give all of the updated statistical probabilities, given the recent advance, surrounding the 4-year cycle. A subscription also includes short-term updates three nights a week. Please see www.cyclesman.com.
Tim W. Wood
© 2006 Tim Wood