It's a 4-Year Cycle Thing, and It Ain't Over!
By Tim W Wood CPA, January 25, 2008
As I have watched many of the mainstream financial shows over the last week or so it is obvious that confusion reigns at even the highest levels in regard to the state of the financial markets. Yet, the answer is very clear and I have been warning about this for some time. We are now seeing the unwinding of the second longest 4-year cycle in stock market history. This cycle was stretched because of the relentless actions by the powers that be to prevent the market from the natural correction process. As a result, the 4-year cycle that began in 2002 became extremely over extended and artificially inflated. I have said all along that cycles can contract and expand, fluctuating just like the cyclical changing of the seasons. But, just because fall may not give way to winter until late in the year does not mean that it won't be a cold and brutal winter once the season finally changes. As for the stock market, the cycle cannot be manipulated to the point that it no longer exists. Winter has just set in and we are now beginning to see the fallout from this overly manipulated and extremely extended cycle.
As the equity markets began to rally out of the June 2006 lows, many jumped on the bandwagon that the 4-year cycle low had been made. I stated then that my intermediate-term CTI had turned positive triggering a buy signal, but that the 4-year cycle low had indeed not been made. The intermediate-term CTI has done an outstanding job at identifying the trend and stayed positive all the way into December 2006. A week later it turned positive once again, and remained positive into January 2007. In February 2007 the CTI turned down, triggering a sell signal and warning of the decline that followed into March 2007. Many also said that the March 2007 low marked the 4-year cycle low. As the CTI turned up in March it once again gave a buy signal, but based upon my statistics I adamantly disagreed that the 4-year cycle low had been seen. Rather, I emphatically stated that we were seeing an unusually stretched 4-year cycle and that the low was still ahead of us. I have taken much criticism for this view. Nonetheless, my long-term technical and statistical model is now proving itself correct. This data is now confirming the October 2007 high as having marked the top of what has, in fact, proven to be the second longest 4-year cycle in stock market history, and I know of no one else that has made this call.
Well, the Fed came out on Tuesday and once again cut interest rates by the widest margin since August 1982. The rally that has followed has everyone once again bullish and singing the Fed's praises for saving the world from the financial woes that were taking root. But, fact is, my Fed model has proven that in reality the Fed is making these cuts because the short-term credit markets are forcing them to do so, and that they spin the news to make one believe that they are doing this to support the equity markets. The truth is that the impact of these rate cuts is temporary at best. It seems that many are unaware or have forgotten that as the decline unfolded into the last 4-year cycle low, which topped in 2000 and bottomed in 2002, the Fed cut the Discount Rate from 7.50% to 2.0% and this did nothing to stop that decline. In fact, as you can see in the chart below, once the rate cuts began the market still continued lower. From the time the rate cuts began in January 2001 the S&P 500 fell from 1,283 all the way down to its final low at 768. This was a 40% slide in the S&P in spite of the rate cuts.
Point being that already everyone is finding reason that the decline is now over. This reminds me of the Dow theory primary trend change that occurred on November 21st. I wrote then that the markets happened to be making a short-term low and that a rally was due. I stated in several public interviews and postings at that time that once the rally I was expecting began, it would cause this Dow theory primary trend change to be questioned, and this is precisely what happened. Within days everyone was saying for one reason or another that the Dow theory signal wasn't valid. Plus, the Fed even cut rates in early December. But that rate cut didn't work and the Dow theory primary trend change proved correct as the market moved lower into the new year.
I can tell you now that at this time there is absolutely no evidence that the decline into the 4-year cycle is over. I can also tell you that the decline into that low will be accompanied by rallies along the way. I can also assure you that as each one of these rallies unfolds, the talking heads and "analysts" that have been wrong about the Dow theory signal and the extended 4-year cycle will find reason that the decline is over. Ask yourself a few simple questions. Did you hear on TV or the talking heads from Wall Street that the market had topped in 2000? Did anyone tell you that the decline out of the 2000 top would take the Industrials down by over 4,500 points to violate the 1998 4-year cycle low? Do you not remember being told as the decline into the 2002 low began that we were not in a recession and that we had not begun a bear market? Were you told that everything was okay as the market turned down this past October? Were you not reassured that the decline was over in November and again in December? Are we not beginning to hear the same thing now?
Well, I did in fact say that the decline into the 2002 low would violate the 1998 low and this is in print. I have also stated publicly that the advance up out of the 2002 low has been a very extend 4-year cycle and that neither the 2006 nor the 2007 lows qualified as having marked a 4-year cycle low. I have also had buy signals at each of the turn ups as this cycle stretched further and further. I'm now telling you that the dust has not settled and that the bear has a few more tricks up his sleeve. You have been warned once again!
Tim W. Wood
© 2008 Tim Wood