Monday’s 2% rally helped recent stabilization attempts gain a bit more traction, and breadth expanded to about 6/1 bullish all 11 sectors experienced gains. 8 of 11 sectors finished up more than +2% on the day, and REITS and Technology rose the most, while Staples and Energy lagged. However, as seen on daily charts below, this recent strength over the last 2 of 3 sessions has not been sufficient to break either the one, or two-month downtrend, so it’s truly difficult to think much has changed just yet. Importantly, Treasury yields firmed up during the day and seem poised to break back out to new high territory, with Monday’s close finishing at 4.019%. Overall, the ability to exceed early month peaks at 3825 will be an important first step which would help to add conviction on rallies. At present, I suspect indices could be in for some additional volatile trading over the next week before officially bottoming. However, cyclical lows should likely materialize at/near 10/21, or 10/24 before turning higher into November. Furthermore, Equity indices should begin a sharper rally post 11/10 that should help set in place a rally into mid-December. Bottom line, choppy consolidation is expected into next week, but should ultimately drive a low which allows for a much larger holiday rally above 3850.
Treasury yield peak looks close, but yields still seem to require a final push higher
Yields represent one of the most important areas to concentrate on for those who have an interest in Equities these days. Gathering some conviction on a peak in $TNX and $TYX should directly lead to strength back into Technology and to Growth in the weeks ahead.
Hourly charts resemble a Cup and Handle pattern at present, which is thought to still represent a bullish pattern that might allow for a final push up to 4.10-4.15%.
Counter-trend signals, however, are now officially in place which should allow for an upcoming reversal, and I expect that happens likely by the end of October.
Weakness back under 3.84% would be important and negative for Treasury yields, and in turn bullish for Equity indices to turn higher with greater traction than recent rallies have shown.
Weekly SPX cycles seem to suggest a 2Q 2023 bottom
As has been discussed, daily cycle composites remain positive, and have an upward bias from late October into December of this year, not dissimilar to Gann’s Mass Pressure index. However, weekly composites still show downward pressure into 2023. Based specifically on this composite, one could expect Equity indices to bottom out by late next Spring and start to turn higher for the balance of next year.
This composite has shown many accurate peaks going back to the 1920’s using just a few key inputs, and one of the more important concerns the 180-week cycle and 90-week cycle (Many who are fluent in the works of W.D. Gann might also recognize these inputs).
The composite peaked last October within a few weeks of the broader market top, which largely lined up with where NASDAQ and Russell 2k, not to mention DJ Transports peaked out (As we’re all aware the “FANG” dominated SPX managed to churn higher into 1/3/22 before peaking).
It’s important to consider the amplitude line (Shown in Pink) as being quite important for intermediate-term turns, and not as a gauge for magnitude for these rallies or declines. Thus, the extremes both higher and lower are not significant. However, the turns are much more important and seem to suggest that Q4 rallies might still fade into early 2023 before a meaningful low is in place. While phasing of these cycles can change somewhat, it’s likely that next year should be important.
Other sources, such as Samuel Benner and Edward Dewey’s cyclical studies, show 2023 also to have significance (Samuel Benner’s Pig-iron cycles are considered legendary and were written about extensively in his work “The Prophecies of Future Ups and Downs in Prices” back in 1875). Finally, for those who study Saros cycles, 2023 lines up on the same Saros cycle as 1987 and 1969. Readers with interest in this area might wish to explore the intersection of Saros cycles 130, 132 and 134, which was discussed historically by my colleague Chris Carolan.
Cycle composite backtested from 2000 to 2010 shows interesting results
Interestingly enough, this same cycle composite, when studying the 2000 and 2007 peaks, looked to have turned right on time at the highs. While the bottoms were off by a number of months, the overall directional trend looked accurate for this period.
As noted previously, the huge downswing into 2005 failed to turn down too meaningfully but did mark a time when SPX consolidated gains a bit, before moving up sharply “on schedule” in mid-2006 into 2007.
The late 1960’s into 1980 had three meaningful peaks and three meaningful troughs
The period during the late 1960s into 1980 also had some fairly impressive results. My Composite captured most of the decline of 1969 along with mid-70’s bear markets, of which the 1973-1974 decline stands out as one of the greatest of that decade. The turn back higher in 1977 was about one year early but rose steadily into 1980 and SPX caught up in 1978.
Late 1920’s to 1940’s reviewed.
The same cycle composite going back 80-100 years, back to the late 1920’s into early 1940’s also largely proved to capture most of the intermediate-term swings, even if it missed the actual 1929 peak. This composite turned down in late 1930 into 1932 when the DJIA fell very sharply.
The rally into 1937 as well as bottoms in 1935 and 1942 seemed to be fairly accurate within a few months of meaningful lows.
Overall, these composites were formed by my own inputs and others might have different results. However, I find these intermediate-term inputs helpful towards understanding the larger swings in the market. This composite was a helpful tool along with diminished breadth in 2021 towards thinking that a larger peak could happen in stocks which I discussed in my outlook on 1/20/21.