Tim W. Wood, CPA
Editor, Cycles Market News & Views
"Understanding Cycles"
Transcription of Audio Interview, April 5, 2003
Editor's Note: We have edited the interview in this transcription for clarity and readability.
JIM PUPLAVA: Welcome back everyone; it’s time to introduce my guest this week. Joining me on the program is Tim Wood. He’s a CPA. He’s Editor of Cyclemans Market News and Views. Cyclemans.com is a Website he has that provides investors with a place where they can obtain, what I call truthful and non-biased factual information about the financial markets. Tim’s primary focus is on the stock market specifically, the Dow Jones Industrial Average, the S&P 500, the Gold Market, the dollar, and treasury bonds. The information presented on the site is based on technical analysis and not on hope and hype. Tim’s technical studies are based on his knowledge of both market cycles and Dow Theory; his knowledge of cycles is based on the methods he learned from Walter Bressert. His knowledge of Dow Theory comes from the studies of the original works of Charles H. Dow and William Peter Hamilton, Robert Rhea, George Schaefer and Richard Russell. Tim I want to talk about an article that you wrote awhile back and it was called “Has The Stock Market Bottomed?” and you said no, it’s not even close. Let’s begin with that because what investors are hearing from the media today, what they’re hearing from Wall Street is the new bull market began last October, this is a new bull market. You disagree.
TIM WOOD: I disagree totally and I can lay the ground work for that if we can digress just a little bit, we can back up to the original article that I did back in the summer of 2001 based on the methods that I learned from Walter Bressert. I applied those to the 4-year cycle in the stock market and they call it a 4-year cycle. And cycles, they breathe, they contract, they expand, but by and large this particular cycle averages four years in duration. Going back to 1896 the average duration is 47 months, 47.08 months. So, it’s termed the 4-year cycle; and what I did is I went back and the study was very simple. I just looked at every 4-year cycle going back to 1896 at that time, dumped the numbers in a spreadsheet and looked at when the cycles broke and I found a pretty interesting phenomenon in that, every time the 4-year cycle had topped in 20 months or less, we had 100 percent of the time taken out the previous 4-year cycle low and that had occurred five times between 2001 and 1896 and based on that study, I looked at the current structure of the market and I said hey, we have a 4-year cycle top in place, it had occurred in like, 17 months I think on the Dow, and 16 on the S&P or visa versa at that time, and based on that I wrote an article and it came out in Technical Analysis of Stocks and Commodities Magazine in November 2001, and in that article basically I forecasted the decline that we saw last year. I said that we would see a close below the 1998 low and that it would happen in 2001, and it did. We got that low that closed below 7400 and then from there, I started digging and trying to figure out, well when’s this bear market going to be over and I started digging into some of the Dow Theory concepts and combining that with my cycles work, and what I found in going back and looking at some of the works of the great Dow Theorists that you mentioned, I found that in the early days what they call a bull market, when I say early days, around the turn of the century, they early 1900’s, prior to 1920’s, what they called a bull market was nothing more than the upside piece of a 4-year cycle and what they called the bear market was nothing more than the downside piece of a 4-year cycle and I found in the original writings of these guys, where they gave dates of bottoms and tops or beginnings and endings of bull and bear market periods and those dates were pretty much exactly the same as what I had termed and labeled as my 4-year cycles. So I thought that was interesting; and then the next thing that I saw is that as time progresses and is kind of my theory, that as the society become a lot more sophisticated into the �20’s, that these bull and bear market periods became longer and longer, in other words, the 4-year cycle started stringing together and the first example of that was the bull market from �21 to �29. In my eyes this country has seen three great bull markets, two great bear markets and we’re probably in or I feel like we are definitely in the third great bear market. But back to the �21 to �29 run, that was a period of two, 4-year cycles and I want to throw up some numbers out here to give folks really something to think about. The �21 to �29 bull market period was, like I said, a period of two, 4-year cycles, the total advance from the bottom to the top was 568 percent. The other interesting thing I found that was consistent with the single 4-year cycle bull and bear market periods, was that the bear market that followed from �29 to �32 was 37 percent of the time or the duration, three years, of the preceding bull market and then moved on to the next great bull market period, which was from �42 to �66. That was a period of 24 years, it was six, 4-year cycles strung together and the total advance was 1076 percent. It was roughly double the first bull market period and then a look at the bear market that followed from �66 to �74 and I found that the duration of that bear market was 33 percent. Eight years, 33 percent of the time of the preceding bull market, and then in my mind, cyclically, the bear market ended in �74, that was the low point and that’s where the new bull market began and that period was from �74 to 2000, that was a period of 26 years, and seven, 4-year cycles. Now look at this, the percent advance of 2061 percent and the picture I’ve just drawn here, think about this, each one of these bull market periods have doubled in intensity. The first one was 568 percent advance, the second one was 1076 percent advance, and this last bull market period from �74 to 2000 was 2061 percent advance and now, you know here we are early 2003 and folks are thinking that this bear market is over, and I can tell you, it doesn’t take a market analyst to look at that and say you do not correct a 2000 percent advance in a mere three years, two and a half years. It just doesn’t happen. My projections, based on, if you look at those numbers, you say okay, well this things going to last 33 percent of the duration of the preceding bull, that’s going to take us out to 2008 and if it lasts as much as 37 percent that’s going to take us out to about 2010 and you say, well but that’s only two examples that you can really draw from. No. Back like I said, prior to 1920 the 4-year cycles were in themselves the bull and bear market and it’s consistent the bear markets run about a third as long as the preceding bull markets and then cyclically if you look at it, this bear markets got to end with a 4-year cycle bottom, so ideally, that means, I would say 2006 at the earliest, and probably 2010 at the latest; and just looking at that there is no way that this bear market is over at this time.
JIM PUPLAVA: In your letter you say, is the bull market over and you say not even close. You acknowledge something that I think a lot of the astute market technician’s attribute this bull markets beginning in 1974 as opposed to, let’s say 1982. I agree with you there. You also have some targets or minimum targets on where you think the S&P is going and where the Dow is going and the reason I find those articles or those targets interesting, Tim, is I come from a fundamental background and if we look at where earnings PE Ratios, or dividend yields would have to be to make this market a bargain again we come at close to the same figures that you do, so we’re going to let you talk about your targets to let investors know just how much risk there’s still left in the market.
MR. WOOD: Okay. Be glad to. It’s really pretty simple if you look at a monthly S&P chart, there’s a huge formation between 1998 and present, really, I say present last year, is what you call a head and shoulders topping pattern and you can take a measure and move, the technicians would know what I’m talking about, you measure from the head down to the neckline and then extend that same number of points below the neckline once that’s broken, and you come up with a measure and move and I show, I’ve seen different readings, I guess based on how people take the measurement, but my target is 314 on the S&P and that would put us well into the 3000 range on the Dow, and then from a fundamental point of view, I subscribe to Decision Point that posts the S&P earnings out there and I took current earnings and then just backed into what would have to be the S&P selling at in order to get the PE’s down to the 5, 6 range. I don’t remember what number I took up, maybe 6 or 7, I don’t recall and it came real close. It was like 314 or 315 as well. It was within a couple of points of my technical objective.
JIM PUPLAVA: Well just to put that into perspective in terms of risk, with the S&P today closing at roughly about 881 a target of 315 is almost a 64 or 65 percent decline. The other thing about this market bottom that Wall Street is projecting, you combine along with your works other technical indicators, for example you use Paul Desmond’s study of 90 percent down days and Peter *Elides *CINCI Indicator. I wonder if you would explain what a 90 percent down day is because we’ve seen a couple of them this year and they’re important to arriving at market bottom. So, explain the 90 percent down days and then Peter Elides Indicator if you would.
MR. WOOD: No problem. The 90 percent day or indicator is nothing more than you take the points, Paul Desmond takes the total points from the NYSE and the total volume on the NYSE and separates it into up volume and down volume, up points and down points and in order to have a 90 percent up day, let’s say, you’d have to 90 percent of the points have to be up points and 90 percent of the volume has to be up volume and then visa versa for a down day and Peter Elides CINCI Indicator it’s based on, it’s a proprietary thing and I hate to get into too much of what it is without his permission and I don’t have that permission, he has shared that with me, but it’s basically looking at advanced declines and what I was looking for, I ran across actually the work of both of these guys and the problem with cycles, no method is perfect, but the problem with a cycle is that when you want to look and confirm a cycle of one degree absolute confirmation, in my mind, comes with the cycle you have to look at the cycle of the next smaller degree and the cycle of the next smaller degree under the 4-year cycle is a seasonal cycle. Well you don’t want to wait a whole year to know the direction of the market, so I was looking for some early warning indicators, something that would tell me we have a four year bottom in place and I ran across like you said, these two studies and I overlaid first the Desmond study with mine and I found with only two slight exceptions, going back to 1940 which is as far back as he made the data available to me, I think there was some bugs maybe in the data going back into the 30’s and maybe he didn’t want to let that out. But, I had the data going back to the 40’s and with only two exceptions every 4-year cycle has bottomed with the formation of a series of 90 percent down days followed by a 90 percent up day or two and when I say two slight exceptions. I don’t recall exactly, can’t quote you verbatim what the exceptions were, but one of them there was like two 85 percent down days followed by a 90 percent up day or something like that, so the exceptions would not apply in this case and they were not extreme exceptions at that, and then the other indicator that I had found that is also very, very good, actually it’s probably better than the 90 percent one is Elides CINCI Indicator and Peter has levels that this indicator will sell down to in order to form intermediate term bottoms or longer term bottoms and he’s done the exact same thing that I’ve done, is he’s overlaid this with the 4-year cycle study he found that all 4-year cycle bottoms have occurred at a rating of .98 or less and the October bottom occurred at a reading above .98, so you know, going back to 1920, based on that data it is not likely that October marked a 4-year bottom and also the bottom in October did not produce any 90 percent down days, nor did the rally produce any 90 percent up days, so my argument is that it’s highly unlikely that both of these indicators failed to give us the right signal at that bottom and I just have my doubts at this time that was a 4-year bottom.
JIM PUPLAVA: Now one thing that you wrote in your January Newsletter earlier this year, you were talking about a couple of things, that you hadn’t seen this 90 percent down day series to market bottom or the Elides Indicator indicate that we would be anywhere close to that and you said in October 2002 either one of two things happened, October 2002 was the 4-year cycle low and these historically accurate indicators had not signaled the bottom or the other alternative that the 4-year cycle is extending and thus has not occurred. Explain that.
MR. WOOD: Both of them require quite an explanation. What I’m saying there is, is that, if that was a 4-year bottom, let’s assume that for a minute, then what I’m saying, or what has to be the case is that both of these indicators have failed and if both of these indicators have failed what that tells me is, is that we have the weakest 4-year bottom on record going back, you know as long as this data goes back. In Elide's case it goes back into the 20’s and in Desmond’s case it goes back to the 40’s. So, we’ve got the weakest 4-year bottom going back possibly going back to the 1920’s. So that’s very, very bearish in the longer term. Now if, the other thing I’m saying is that and this is what I think has happened is I don’t think the indicators have failed. I think that what we have seen is an extension of the 4-year cycle and if I remember right what I did in that study is I have that it was 49 months from the October, I say October I don’t recall, anyway the 98 low to the October 2002 low, was 49 months and so I looked at all my data on the 4-year cycle and I found that 35 percent of all 4-year cycles have extended beyond the 39 month mark and actually there was one that had extended as much as 68 months, I believe and so, it’s highly likely that we have seen this cycle extend and I think that what we’re going to see is this cycle roll over and put in that 4-year cycle bottom in late summer or fall of this year, and then I think we’ll see the 90 percent days and the CINCI readings to confirm that bottom.
JIM PUPLAVA: Now, I would just look at this market from a fundamental perspective and, Tim, I don’t think I can ever remember, at least, I’ve been in this business since the late �70’s, where we’ve ever approached a bottom where, for example, number one, we have price earnings multiples, dividend yields and price to book ratios at such extremes. Normally, if you look at where the market is today, selling at somewhere between 28 and 30 times earnings, we are at a period of valuation where normally, most, bear markets begin, so that’s one thing I can say just from a fundamental perspective. The other thing that I have found surprising and I’d like to hear your comments on it. But, I don’t think I could ever remember a period of time where we have had three, 4-years of falling stock prices that the wide, vast majority of investors are still fully invested. Normally at a stock market bottom as we had in 1974, you couldn’t get people to touch stocks. I remember when I got in the business in the late �70’s, you tried to bring up stocks or stock mutual funds, there were very few to pick from and nobody had any interest in stocks. They wanted oil, they wanted commodities, they wanted gold, they wanted silver, collectibles but the last thing that you could convince investors to put their money in was stocks. So, has that surprised you that the spiked, the falling prices that we have had year over year four consecutive years now, that investors are still, basically fully invested?
MR. WOOD: In a way it has, in a way it hasn’t and I think the reason we’ve seen that, in my mind, is because people’s had 26 years worth of training, kind of like I guess training the mice to run through the maze, buy the dips and hold for the long haul and now that the picture has changed, technically and fundamentally that training, they’re going to have to be retrained here and I think that the fact that folks are still as bullish as they are contributes, or actually it doesn’t contribute, it’s a direct correlation to it, I think why we haven’t seen these 90 percent days I mean the 90 percent down day is nothing more than panic selling. I think that’s how Desmond describes it and because we have not seen those days at this you know, important bottoms or anymore of them than we’ve seen I think it just goes to show the complacency with folks in this market and then from a Dow Theory perspective, what you just described there in ’74 is what some of these Charles Dow and some of these other old Dow Theory guys describe as the third phase of the bear market, and we’re just now in the beginning of the second phase of the bear market and that’s when earnings start to deteriorate and fundamentals come home to roost so to speak. So, all this just shows me that we’re in the early stages of the bear market.
JIM PUPLAVA: I wonder, Tim, if you would spend a little bit of time talking about Dow Theory, the three primary movements and then follow that up and talk about the three primary movements in a bear market. What are characteristic of these three movements so, because I think if we can frame that question investors might get a better look at where we are today.
MR. WOOD: Well the way Mr. Dow described the three primary movements, I say Dow, all of these guys, Rhea, Hamilton, all of them, described was it kind of related it to the ocean and he said you have the daily movements, which is basically nothing more than noise is what he called it; and he called those kind of the little eddy currents along the shoreline and then you have the intermediate term movements and he described those as the waves and then you have the primary trend, the long term movements and he described that as like, thinking of that as the tide. Then in reading some of the works from these guys, these paddle movements in my mind, like I said you’ve got to remember that back in the time that these books were written, that was my 4-year cycles and they actually give the dates in which these things, these 4-year cycles, or the bull and bear market periods topped and bottomed and those were indeed the 4-year cycle tops and bottoms, so anyway that’s the movement and what cycles allow you to do from a Dow Theory perspective, it allows you to extract and quantify the degree of the move and when I say degree are we looking at a long term bottom or top, are we looking at an intermediate term or a shorter term top or bottom. So, I think maybe that will answer that question or clear that up. Then looking at the three stages, if you will of a bear market, and I don’t recall exactly the wording of how they describe it, but in the first phase it’s basically a denial phase, you know the market will start down and people are very complacent in that just, hold for the long haul, and there’s virtually no panic people stay in the market as they see their profits erode, and then you move in from there into the second stage of the bear market and that’s where the fundamentals, the earnings start to come in poor and it starts to be, people start to realize, hey, something is wrong here, this market is not going to turn around and maybe the guys on CNBC are not really being straight forward with me and maybe my broker is not really telling me the truth. When people start to ask some questions, and then the third and final phase of the bear market is exactly what you described in 1974 and people just throw in the towel, they don’t want to have anything to do with stocks, they sell at whatever the price just to get out, they can’t stand the pain anymore, and then that’s usually when you’re at the bottom.
JIM PUPLAVA: Well, let’s talk about speaking of bottom, the word coming out from the financial presses, we are at a bottom, we have seen some spectacular rally’s here recently as a result of the war and in your February newsletter you address the war. Why don’t you tell our listeners about that and your perspective on it because we saw eight, extremely explosive days in the market, I saw quote literally on a website today, a well known one, we’ll leave it anonymous, but they basically have said that once this war is over they expect anywhere from another 25 to 35 percent rally in the market as the market discounts the good times that will follow.
MR. WOOD: Well we could very well see a rally and I think that may be because of people’s expectations, I think the expectations are an error and what I covered in that February Newsletter, is I went back and looked at the wars and where they occurred within the Kondratieff wave and the off-wave is roughly call it a 54 to 60 year cycle if you will, and you can further divide the Kondratieff wave without getting too deep into that subject unless you want to, into really five pieces and you come out of the bottom of the *Kondratieff wave and you have a very mild inflationary a beneficial, inflationary leg and in my mind that started in the early �40’s, sometime in the early to mid �40’s, it bottoms out with low interest rates and that type of thing. It starts with a trough war which was World War II in my mind, and you have a great bull market that has spun off in that period and of course we saw that starting in 1942 to 1966, is the second bull market period that I described, and then you move up the cycle and you move into a more inflationary environment and we saw that starting in the late �60’s early �70’s with the commodity prices and really got into what you’d call runaway inflation into the late �70’s and that topped out in 1980 and then that tops with a trough war and any of the other little wars and skirmishes that occur on the upside piece of that Kondratieff wave are positive and even the top, Vietnam was the so called, there’s a peak war in the Kondratieff wave, which was Vietnam, and you have a period then of stabilizing prices and that war is generally positive for the stock market, but then as you cross over, you start the down hill piece of that *Kondratieff wave, the wars that have occurred there have not been positive and I think that the trap that people fall into, is they look to recent events and they say well war is positive for the market and they look into 1942 at World War II and they look at the Gulf War in 1991 and the difference with ’91 is, is that as you come down the *Kondratieff wave, the first little piece of the Kondratieff wave down is a beneficial deflationary environment. In 1991, we had just had a 4-year cycle bottom, we were in the middle of the greatest bull market of all times, we were in the beneficial deflationary piece of the *Kondratieff wave, heck yeah it was beneficial or the war was beneficial for the market, But this time everything is different I think. I don’t think that this war is going to be good for the economy, for the market. I think what can go wrong, will go wrong we’re in the part of the Kondratieff wave where such events are just not a positive event. We’re in the middle of a bear market and I don’t see that this is going to be positive development for the market in anyway. Now, short term yes. If they find Hussein tomorrow, don’t think the market’s not going to rally. But what I’m saying is, it’s not going to be sustained, it’s not going to change anything. This bear market didn’t begin with worries over Iraq and it certainly isn’t going to end with them.
JIM PUPLAVA: I want to take this a little step further in terms of were you seeing this perceived, because I agree with you, I think because expectations have been built into this market in other words, the reason that earnings are poor, companies aren’t spending money, laying off workers and the consumers retrenching is all over worries over war, so the expectation or the belief is once this war is over, then companies will start spending money, hiring workers, profits will go up, consumers will spend and the good times will follow and certainly when you have expectations you can see a brief rally, in fact I can see an explosive rally taking place, but then eventually reality sets in. You had, Tim, a theory of where this is going to go this year, where possibly if we don’t take out previous cycles we could go hard down probably into late summer, maybe early fall, down to the 6000 range in the Dow, maybe 600 range in the S&P before we get a remarkable rally, much like we did for example, the bear market rally’s that occurred in the �30’s. I wonder if you might explain that.
MR. WOOD: Sure. No problem. Where I think we are, I mean, first of all my bearish argument starts, I have to start that at the October bottom and we discussed why, I mean we just didn’t have the classic signs to confirm that as a 4-year bottom. Now it could have been this could have been the first time, but odds are just against it. So, if we start at that point and then I have to turn to my seasonal cycle work and what I do is extract cycles of various degrees just like we did with the 4-year cycle, just like I explained there, and if I look at my seasonal cycle work, what I found is really two statistics I can offer; going back again to 1896 looking at the seasonal cycle, which averages a year in duration, the last seasonal cycle bottomed in October of 2002 and the next bottom is ideally due in the fall September or October of 2003, well the statistics are that any seasonal cycle that has topped in six months or less with a confirmed 4-year cycle top in place, has 97 percent of the time taken out the previous seasonal cycle bottom. So what I’m saying there, if you’re operating under the assumption that October was not the 4-year bottom, then what you’re saying is, is that we’re still operating under the assumption then that the 2000 top was the 4-year top, in which case this statistic would apply and until we see this market rally above, how do I say this so it makes sense because it’s kind of a two-fold thing. It has to rally. First of all we got to get it above the December 2nd high, but then we got to continue to make highs after the sixth month from the October bottom which would be into May. So, we need to see this market rally, make new highs out of the move, into May before we could get past this bearish statistic on the seasonal cycle and then the other statistic, you say well, I’m not sure that we don’t have a 4-year bottom in place so I guess it’s fair enough to toss that statistic and look at the overall statistic of all seasonal cycles regardless of where they’ve occurred in the 4-year cycle. I found that 73 percent of those seasonal's top out in six months or less have taken out the previous 4-year cycle or excuse me, seasonal cycle bottom. So, using that statistic we have at least a 73 percent probability of a decline below the October low if this rally fails between now and April 30th. In other words we need to see continued highs into May and then as far as getting the decline of how I came up with those price objectives is that the average decline of those seasonal cycles, well there’s a couple of different statistics there, of the seasonal cycles that have topped out in six months or less, I think the average decline was 27 percent of the seasonal cycles that had topped out in six months or less and took out the previous seasonal low, the average decline was like 31 percent and both of those numbers take us down well into the mid 6000 range and I can back those numbers up by looking at my 4-year cycle study. What I found there is that the average decline of all 4-year cycles that have topped in 20 months or less was 46 percent, which takes us into the mid 6000 range as well. So, there are three different angles pointing toward that mid 6000 range if we see this rally fail.
JIM PUPLAVA: And if we see this rally fail and we go hard down leading into the summer, almost like a replay of last year when we were heading hard into almost the end of July, then you talk about, we from that point, we could see what is called a bear market rally that would look like a new bull market. Describe what you see unfolding from that event.
MR. WOOD: From that point, coincidentally I see not only a 4-year cycle bottom in the stock market coming in, in late summer or fall I see a 4-year bottom in the dollar coming in there as well, so those two kind of, I guess they jive with one another and then what I think we’ll see from that point is a rally just like what you described in 1929, we sold off hard into ’29, we put in a 4-year cycle bottom and then we had a five month rally that was almost straight up which was nothing more than the upside piece of a 4-year cycle, now what I think we’re going to see, we get the 4-year bottom in place and we’re going to see one heck of a rally coming out of there, it’s going to be hard fast and furious and then what we have to do is start applying the seasonal statistics again. Does this rally make it past the six-month mark, yes it does. Well, what does that mean? Then that means that as the next seasonal rolls over and makes its bottom, the previous seasonal should hold and then you monitor the next cycle and you just bite it off one cycle at a time to develop your expectations. But, I think the bottom line answer to your question is once we get this four year bottom in place, if I’m right with the scenario that I think I see we’re going to see a heck of a rally toward the end of the year into the first part of next year.
JIM PUPLAVA: Do you think it could carry well into; let’s say the November elections of 2004?
MR. WOOD: I don’t know. Like I said, it could, but what we’re ultimately going to see is this, if it, I haven’t done the math on that, if it bottoms, let’s say ideally in the fall of this year, pick a month, say September, and the rally can last six months or more then the next seasonal bottom would occur above wherever this bottom comes in at. Alright and then from there we should see one more seasonal up and then you have to look at that and can it make it six months or more, so that gets us out about 18 months or so, so yeah, I think that math does work.
JIM PUPLAVA: Well, it would work well for the incumbent in the White House if that proved to be the case.
MR. WOOD: Exactly.
JIM PUPLAVA: I want to talk about some of the other work that you follow. We’ve been following, or we’ve been talking about the stock market. You believe that we have not hit a bear market bottom, if I can summarize. We could, if we do not take out the highs of December and October of last year the end of April, then we could be hard down as much as 30 percent by, let’s say summer or early fall with a rally following. But, overall in the larger scheme of things this would be nothing more than a bear market rally in a large scale bear market that would not bottom as soon as 2006 to as late as let’s say 2010. Have I summarized that correctly?
MR. WOOD: You have summarized that perfectly. The one other thing that I might add, is we’ve kind of focused on the bearish side here but let me say this, let’s say for a minute, just let’s make the assumption that we do see this rally carry into April, May, June okay, and it does make new highs past the December 2nd high at that point, then what does that mean? What that tells me is that yes, October was probably the 4-year bottom, the confirmation of that is then going to come when this seasonal cycle does roll over the expectation would then be to see the seasonal cycle bottom occur above the October bottom, which would then give us the ultimate confirmation that October was the 4-year bottom, but then, in a sense that’s even more bearish because again, that would be the weakest 4-year bottom on record and I would look for the thing to fall apart instead of having, being able to look forward and say we’ve got maybe six months to 18 months of a rally ahead of us, you could say hey, we just had our rally and this thing is teetering on the edge again and all we could look forward to at that time would be three more years of down. So, even the bull’s better hope that we see this thing decline into a 4-year bottom here.
JIM PUPLAVA: Let’s talk about some of the other markets that you follow. You follow the bond market, the dollar and also the gold market. Let’s talk about some of the implications of the other market. Apparently the dollar is in a down cycle. Talk about where you think the dollar is today. Where it’s going, short and longer term.
MR. WOOD: Okay we had a seasonal cycle occur last year in the dollar in July and of course the next seasonal cycle is * in sometime around late summer or mid summer of this year. July or so and we’ve put in, if I could, backing up a step, we put in a 4-year cycle top in 2001, we rolled over into the seasonal cycle bottom that occurred in July 2002, we rallied for a month and now we’re headed down into another seasonal cycle bottom and like I said that is * ideally in the summer, say sometime around July of this year and I think that what we’re going to see is there’s also a 4-year cycle bottom view in the dollar and what I think we’re going to see is a firming of the dollar in late summer or fall as we approach that 4-year cycle bottom and that should coincide with the 4-year cycle in the stock market as well. Now one can bottom a month or two before the other or whatever but it’s coincidental that I see that both of these cycles bottoming at approximately the same time.
JIM PUPLAVA: Well let’s talk about the opposite side. So, let’s say we see the dollar in the stock market trend down, as certainly we have seen. They get to that level either late summer, early fall let’s talk about the implications for two other markets you follow and that’s the bond market and the gold market. Let’s talk about each one individually. Let’s start for example, the bond market, because to me it’s looking toppy, to me it’s looking like we’re getting to the end of an interest rate cycle and that we’re more than likely to see a rise in rates going forward. That’s just my perspective. Let’s hear yours.
MR. WOOD: Okay. Well starting with the long, long term in interest rates, there is a 60 year cycle in interest rates and that cycle last bottomed, depending on what rate you’re looking at, it last bottomed in the early �40’s and some of the stuff I follow suggest that it bottomed in ’44, so and I’ve seen other interest rate bearing instruments that had bottomed in ’42, so sometime in the early �40’s this 60-year cycle bottomed, so we’re approaching the time frame for this long term cycle in interest rates to bottom again, which means we should be approaching the top in the bonds. Now if you narrow that down into the three-year cycle, I think that we saw the three-year cycle in bonds in early 2002, we’ve rallied hard up into the recent high that we saw last month and that was a seasonal cycle top and now we’re seeing bonds sell off into a seasonal cycle bottom and that seasonal cycle is due to bottom ideally between now and early May and once that bottom is in place, I think what we’ll see obviously by default if that’s the seasonal cycle bottom, we’re going to see a rally, and of course the question is, is it going to take us to new highs. I don’t know. You know we have to wait and see. If it does, then that tells us that the three-year cycle is still moving up. If it doesn’t, then that tells me that the three-year cycle has topped and then of course we’ll have to, longer term, the longer the cycle the longer it takes to have that ultimate confirmation but somewhere here, we’re real close to seeing, I think, a low, I say real close, we’re within a few years certainly of seeing the low, that 60-year cycle low in interest rates occur and I might add that the ideal timing for the *Kondratieff wave is somewhere between say 2006 and 2010 and that generally occurs in the ball park within a year or so of a low cycle in interest rates. Yes, in the short term I think bonds are very toppy. We are selling off into a seasonal low, but we might have one more three-year cycle up, it’s possible.
JIM PUPLAVA: And certainly if we were to see a rise in interest rates, let’s say sometime following the end of the year, beginning of next year, which might be just the kind of fundamental event that triggers the next beginning of another bear market cycle that heads down.
MR. WOOD: Absolutely and we are getting close to the time for that 3-year cycle tops so that could very well happen.
JIM PUPLAVA: Let’s talk about gold because we’ve seen the price of gold bottom, it is, gold equities, gold has done well over the last two years. There are many in the gold camp, I happen to be one that think that we’re in a new bull market cycle for gold. Although, just like any other cycle, bull market there are going to be corrective periods of time or counter trends. I would like to hear your perspective on gold.
MR. WOOD: Gold is tough. I’m not going to argue and the problem that I have with gold is, you know, you try to stay pure or I do, in that I have a purely technical approach, but you can’t help, I mean you have a brain in your head, you think, and you know looking at the financial storm that I think lays ahead, fundamentally it paints a bullish picture to me for gold. But then when I look at some of these cycles I start getting mixed emotions and one, starting with the again the *Kondratieff wave is that we’re in the deflationary stages of that wave and that makes me tend to think that well, maybe we’re going to see gold turn and go down here as all the other commodities deflate. But then I look at my cycles work and the dominant longer term cycle in gold, there’s a nine year cycle it bottomed in 2001 and like I said before, cycles work as a layered approach you have a nine year cycle in gold and then you have the underlying seasonal cycle and when a nine year cycle bottoms or a cycle one degree bottoms the cycles of the next smaller degree continue to make higher highs and higher lows, thus being in an up trend. Well so far the seasonal cycle has made higher highs and higher lows and we just put in I think a seasonal cycle top in February and now we’re rolling over into a seasonal cycle bottom. Now ideally that bottom is not due until sometime in the summer and looking at my statistics, my seasonal statistics in gold, the bull market is still in tact and quoting those statistics I think that they are every seasonal that has topped in five months or less and I’m saying this cold, because I don’t have the numbers in front of me, but I think it’s every, any seasonal that has topped in five months or less has 81 percent of the time taken out the previous seasonal bottom. Well in this case, we rallied from the August low to the February high, so that’s six months. So, we made it past that hurdle. So the expectation is, that as we roll over into the seasonal bottom then we’re going to see the August low of last year that I think it was around 299 � or so that should hold and thus defining the higher, higher low concept and the bull market is still in tact. Now the thing that bothers me is that, we just put in a weekly cycle bottom, looking at the cycle of next smaller degree under the seasonal that’s a roughly a twenty week cycle or so and I don’t think that we’re going to see that cycle exceed the February high. The reason I say that is my oscillator has broken down on the monthly chart and we have a monthly swing high in place so it’s going to be very, very tough, I think, for gold in the short term to get back above that 285, 290 level and I think what we’re going to see, like I say, does this rally fail put in a seasonal bottom and then we’ve got shot higher and we just have to take it a cycle at a time. If the following seasonal cycle cannot rally above that 280, 290 level then that’s pretty much going to cap this nine year cycle and then at that point, my own work is going to tell me that maybe this bull market is over in gold and it maybe the next nine year cycle before we see the moves that we think we’re going to see and if that does occur that also is in line with what should happen according to the *Kondratieff wave and I’m impartial. I’m not saying that’s what’s going to happen. I don’t know. I’m a gold bug myself. But, I have to play it like I see the cycles and right now it’s going to be very, very tough, I think, for gold to get above those levels with this next weekly cycle up.
JIM PUPLAVA: What does your gut tell you, though, in terms of whether this is a new bull market or not? I mean, like you say, technical studies are very scientific, you look at the cycles, the charts and the charts tell you a story, but then as you said you’re a thinking man too, you think on this, what does your gut tell you. Or, what are you thinking?
MR. WOOD: My gut tells me, what I want to believe is that, look, I’m not going to sugar coat it, the financial I think, in using your words, the financial storm I think the perfect financial storm does lay ahead and thinking about that rationally, what I want to say is going to happen is I see the stock market at 3000 or less. There’s a tremendous debt problem out there. People are over-extended in every walk of life. I mean, people I know that have houses that they really can’t afford. What’s going to happen when they start losing their jobs, or a spouse lose their job when these people are living paycheck to paycheck and then what’s going to happen from that perspective to the banks whenever all of a sudden the banks left with these mortgages and on an on and on. You start following those dominos and in my mind that’s a very bullish argument for gold. I mean, what I’m describing here is a financial melt down and in that scenario I think that gold has got to be, I mean there’s got to be some store of value and my common sense tells me that it’s going to be precious metals. So, that’s what I’m thinking, but I’m just saying, I’m very cautiously bullish in that, we have to take it cycle by cycle, in with my work, and looking at these seasonals and as long as they continue to be positive then I’m positive, cautiously so.
JIM PUPLAVA: I look at this market from let’s say a fundamental perspective and what I’m looking at, Tim, when I wrote The Perfect Financial Storm, is I see these different storm funds, not only in the currency market, the financial market and the economy, converging together because living here in Southern California, a millionaire here, now means you own a home. We’ve got people that are in houses, I mean a 2800 square foot, two-story, we call them cracker jack homes on postage stamp lots is $650,000, $700,000. You’ve got people that are driving luxury cars that are between; both cars are $75,000 - $80,000. I have never seen this amount of debt accumulated in all sectors within our economy. In our own state we have a 35 billion dollar budget deficit that resembles the old federal budget deficits. So, as I see all these things converge, I would say it would be almost a miracle for none of these storm fronts to collide and for us to sail through this without any of this happening. Now that’s just a perspective from my, fundamental point of view.
MR. WOOD: From a technical point of view I keep going back to this Kondratieff wave, but from a technical point of view, that’s exactly right. In the bottoming of a Kondratieff off-wave, I mean, it’s all about purging the debt. I mean it’s happened whether this is the fourth, if I remember right, Kondratieff wave in this country’s history and the stories all read the same. It’s about debt.
JIM PUPLAVA: The one thing that I wonder though, when I look at this in terms of the economic experiences of let’s say, Japan from 1990 going forward to today, the United States from let’s say *1932 to the end of the war, where we were, both countries were both major economic powers at the time of the depression. We were also major creditor nations. The United States was the world’s largest creditor nation in the �30’s as Japan is still the world’s largest creditor nation, although China is slowly catching up or fast, quickly catching up. Have you done any studies in terms of what happens when these things unfold with creditor nations verses debtor nations? For example, if you go south of the border, and look at what’s occurring in Argentina, what’s occurring in Brazil and what could be coming to Mexico, how that plays out in countries that are for example, debtor nations verses creditor nations.
MR. WOOD: No, I’ve never done any work there. I really can’t speak to that.
JIM PUPLAVA: Okay. I just wondered sometimes, in my scenario in The Perfect Financial Storm, it’s almost like, if I could use the analogy of the *Natural perfect storm, where you had an artic cold front collide with a warm hurricane. Two storms generated by two different sources, I could almost see deflation for a wide body of the economy or anything associated with credit for example, housing, luxury goods, cars, all the things we buy on credit cards or on installment payments, and then perhaps, sort of a mini inflationary cycle on certain commodities. Precious metals would be one as a storehouse of value. But one that intrigues me is what is going on in energy as we start getting into these decline curves of oil and gas wells.
MR. WOOD: Right and you just brought up an interesting point in that, like I said the declining phase of the Kondratieff wave is deflationary in the last phase of that declining wave is rapid deflation and you may have just hit the nail on the head is that what we see is the deflation may be associated with debt related holdings, such as what you just said housing and so forth and then we have both, we have the inflationary leg, that’s an interesting concept. I’ve never thought about that. You may be right on target with that.
JIM
PUPLAVA: Yeah, I have looked at this and I’ve read a lot of the
deflationary arguments, I’ve studied the Kondratieff wave, but I keep
thinking of the conditions that are different in this country today
verses 1930
MR. WOOD: Okay, first of all the website is Cyclesman.com and if you go there on the homepage you can read about some of the theories that we talked about today, cycles and Dow Theory and the combination of the two. You can also go there, there’s an articles button at the top, you can click on that and it will take you to the first article that was written in 2001 forecasting the decline that we saw in 2002. At that same articles button you can read, there’s a link to a gold eagle article that I did a month or so ago talking about the duration of the bear market and tying it to the cycles and the Dow Theory concept thinking that it’s going to last to 2006 to 2010. There’s some sample newsletters, out there I think I’ve got, there’s several from last year and then I put the January issue out there and then what I try to do in the newsletter itself is guide people, basically with precious metals and then the big thing that I’m doing now is using the cycles analysis to use, to participate in the *Rydex funds and using the cycles to time these intermediate and long term swings in the market to move in and out of the *Rydex, * Nova and Tempest funds and just participating in these market declines and advances that way and I say advances, I have not participated in the first advance since this bear market began. I think that what I’ve been doing is selling the tops, moving into the Tempest fund, but then when we see this 4-year cycle bottom, if I’m right about that later this year, that’s going to be a bottom worth buying and like I said, my preference is to do it through the Rydex funds.
JIM PUPLAVA: And can investors follow this advice through your newsletter?
MR. WOOD: They can. They can also, I send out an update periodically and I say periodically, it kind of depends on what goes on with the market. I’ll send out at least one update in between newsletters, which comes out once a month and then if market conditions dictate, like last week or week before last, I probably sent out three or four updates. So, it just kind of depends on what’s going on with the markets and then folks can always e-mail and call me, they do, subscribers do with their questions and that’s not a problem.
JIM PUPLAVA: And investors, by going to your website, that’s www.cyclesman.com could they subscribe to the newsletter at your site?
MR. WOOD: They can subscribe online there, or if they’re not comfortable subscribing online, they can drop a check in the mail and the address is there and just drop a check in the mail, include your e-mail address and contact information, phone number, just in case, I ever needed it. I would never sell anyone’s information. But just today I had a problem, someone’s computer person came in and blocked some SPAM e-mail and blocked me out so that I couldn’t send them there update and they were sending me e-mails saying hey, I haven’t gotten my April newsletter, what’s the deal and I didn’t have their phone number because they never provided it. Well finally we got hooked up, so the point is, is that please if you do subscribe, I’d like all of your contact information, so that when squirrelly things happen I can get in touch with you and get you your letter.
JIM PUPLAVA: Well, Tim, having read your last four or five market newsletters, I have to say that I am impressed with the way that you call things in your work and I hope to have you back on the program, especially as we get closer to the summer and some of the things that you’re forecasting actually play out in the market. I’d like to have you back and come back and respond. I’d like to thank you for joining us on The Financial Sense Newshour. It’s been a real pleasure to have you on the program.
MR. WOOD: Jim I want to say I’m honored to be here and I would love to come back. The one other thing I want to offer to the investors, I’ve had this thought a couple of times while we were talking throughout this interview, and that is that one of the things the bullish propaganda machine is siding is that there’s no 25 year period in history when you haven’t lost money in the stock market and that’s true. But to put that into perspective, in 1929, if a person was to say 40 years old as an investor at that time, it was 1954. It was 25 years before they just got even again, and a 40-year old waiting 25 years to get even, he’s 65. Who can wait that long just to get even? So, my point is, is that this is a bear market and it’s all about preservation of capital, I think, and then if a person wants to try to participate, whether they do it through me or someone else, I think there’s options out there in using some of these bearish funds. But, like I said that pretty much wraps it up, just preservation of capital.
JIM PUPLAVA: All right, well thanks so much for joining us on The Financial Sense Newshour. It’s been a pleasure. Hope to have you back once again.
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