The 4-Year Cycle and Housing: The Dow Report

By Tim W Wood CPA, December 28, 2007

I continue to receive e-mails asking me if the 4-year cycle low could have occurred last summer or if it could have occurred with the more recent decline into the March low. I would never say that something is impossible or that there isn't a first time for everything. But, I look at probability and based upon those probabilities neither the June/July 2006 low nor the March 2007 low have measured up to the statistical norms that have occurred at every 4-year cycle low since 1896.

These probabilities are derived from the price action of the market's cyclical behavior since 1896 and have been developed through proven trend quantification methods. The results of this data is what it is and has not been skewed or slanted in any way. The numbers are simply black and white much like the results of any scientific research. Does this mean that things are going to unfold exactly according to the numbers? Not likely, but like the old saying, "history doesn't exactly repeat, but it does rhyme." Point being, the path of the market will not ever likely unfold exactly in accordance to a previously similar cycle, because each cycle is unique in its own way. But, at the same time, the ebb and flow of the cycle does occur.

To some, this may sound like the words of a "perma bear," someone trying to talk up their own game or perhaps one of the most stubborn people on the planet. Not true! My opinion is based strictly on the numbers and I would love nothing more than to be able to say that all is clear and that the market's statistics were positive. In fact, it would make my job much much easier to simply say what people want to hear.

That all being said, let me also say that in light of these overshadowing dark statistics my current intermediate-term indicators have been positive for a couple of weeks now. The key is how long these indicators remain positive and where the market goes in the meantime. Also, according to Dow theory, the longer-term trend is still positive. By saying this I am not making a contradictory statement. The bottom line is that the intermediate-term Cycle Turn Indicator that I rely on for the intermediate-term market direction turned up a couple of weeks ago and it remains positive today. But, at the same time we have the statistical aspect of the market surrounding the 4-year cycle and that also remains at play. So, we have two opposing forces so-to-speak. Until these overhanging statistics turn favorable and align themselves with the Cycle Turn Indicator on both the long and the intermediate-term, the market risk in association with a downturn into the 4-year cycle low remains.

In the previous Market Observation I did a brief follow-up on housing. In the current Wrap-up I would like to show you an interesting correlation between housing starts and bull market periods in the stock market. This chart can be found below. Let's begin with the bull market period in which the stock market topped out in 1966. In this case, housing starts topped 2 years prior to the market. Then, note that as the stock market began moving up out of its 1966 4-year cycle low, housing starts expanded, but fell short of their previous high. As the stock market rolled over into its 1970 4-year cycle low, housing starts again contracted. But, then as the market expanded up out of the 1970 4-year cycle low and into the 1973 rally, separating Phase II from Phase III of that bear market, money again poured into housing. As you can see by the housing start numbers, that housing boom was greater than the most recent housing boom. Now take note that the in the wake of the 1966 bull market top, money moved heavily into housing. Also, the 1973 stock market top was preceded by not only a great housing boom, but also housing starts topped out ahead of the stock market by one full year.

Next, look how both housing starts and the stock market contracted into the 1982 4-year cycle low. From that low, both began to rise. Housing starts however topped out in early 1984. This time around the lagging housing starts lead the stock market by 3-years, but this nonetheless was followed by the 1987 decline. Housing then finally hit bottom at the 1990 4-year cycle low and again began climbing with the stock market as it moved up out of that low. That expansion ran all the way to December 1998. This was some two years prior to the January 2000 stock market top. So, once again we saw that a contraction in housing lead the stock market. But, just as occurred in association with the bear market declines of the late 1960's and into the early 1970's, when the stock market faltered, the money poured into housing. This was also encouraged by the sea of liquidity created by the fine folks at the Fed with their massive "save the stock market" campaign that began in early 2001. Anyway, housing starts topped out in January 2006 and have been lagging the stock market since. So, here we sit with the statistics telling us that the 4-year cycle low is still ahead of us and we have seen a major contraction in housing starts. If history has any bearing on the current set up, this contraction in housing starts is once again telegraphing the decline into the 4-year cycle low just as the statistics have been saying all along. Personally, I feel that this longer-term comparison between housing starts and the stock market is another important piece of data that can be used to help us understand the environment that we are in.

The next chart below is a daily chart of the Philadelphia Housing Index and as you can see, it clearly topped out back in July 2005 and to date, we have not seen sufficient evidence to say that a long-term reversal has occurred. In fact, the short-term low that was made in mid-March has now been violated and all indications at this time are that the decline out of the intermediate-term cycle top that was made in February remains intact. As you can see from the data above, the bottom line here is that the continued weakness in the housing sector is not good news for the stock market and is consistent with the statistics surrounding the 4-year cycle in the stock market.

Tim W. Wood

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Tim W. Wood CPA
Cycles Man
1545 Gulf Shores Pkwy, PMB #251
Gulf Shores, Alabama 36542
(504) 208-9781 Tel
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