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We Maybe at a Short-term Low, but Trouble Still Looms

The May 10th peak in the stock market was expected and pretty much occurred right on time in accordance with the clustering of the various cycles that were due at that time. On May 11th the Cycle Turn Indicator produced a short-term sell signal warning of the recent decline. More recently, I have been telling subscribers that short-term cycles were coming due and that we should be expecting a bounce. That bounce is now underway and we are monitoring conditions in order to see if this bounce can evolve into a more substantial move or if it is destined to be a failure followed by more weakness. Our first line of defense and short-term guide on this is the short-term Cycle Turn Indicators. I have plotted the short-term Slow Cycle Turn Indicator along with the Industrials below and it has thus far not confirmed the current bounce. If this bounce should conclude prior to this indicator turning positive, then more weakness will lie dead ahead. On the flip side, if this bounce can turn the intermediate-term version of the Cycle Turn Indicator back up, then a run at the old highs will be underway.

In the mean time, the current Secondary advance, which began back in October, remains positive. As I have marked on the chart of the Industrials and Transports below, it was the January '06 advance that carried both averages above the previous Secondary high points turning the Secondary Trend bullish. From a Dow theory perspective and as of this writing, nothing has occurred to turn the Secondary Trend negative.

But, at the same time, there are troublesome issues that continue to plague the market. One issue is we have longer-term cycles that should begin to weigh on the market a bit later in the year as the 4-year cycle is scheduled to begin its descent. Another issue of concern is the poor internals. I have shown you this chart before, but it's time for another look at it. Note that this indicator peaked in June 2003 and the first divergent top with price occurred in conjunction with the February 2004 price top. Since that time, every intermediate-term advance has occurred with yet another divergent high by my intermediate-term Advance-Decline line. This divergence or non-confirmation is not a healthy sign. In fact, this is exactly what happens as the market presses into the 4-year cycle top. So, not only do we have a significant cyclical turn ahead, we are also seeing the normal internal breakdown that typically occurs as the market moves into the 4-year cycle highs. The one difference this time around is the duration of this internal breakdown. The fact that the internals have not confirmed the recent highs makes this non-confirmation now 3 years in the making. I have said this before and I'll say it again; the only reason that the market has been able to hold up under these conditions is because of the extreme amount of Liquidity that has been pumped into the system. This will not work forever as the underlying conditions will ultimately win out.

Another troublesome issue is the non-confirmation between the Industrials and the Retailers. In the chart below I have plotted the Industrials in the upper window and the Retailers in the lower window. Note that every intermediate-term down turn on this chart has been accompanied by a divergence (or non-confirmation) between these two indexes. The fact that we now have a rather lengthy non-confirmation brewing is also reason for concern.

So, the bottom line is that on a short term-basis, we have a low in place. Given the set up of the intermediate-term, the market's behavior out of this short-term low is very important. When we move out to the longer-term we still have the Secondary Trend, under Dow theory, that is positive. However, we also have other important non-confirmations that should not be ignored such as that between the Industrials and the Retailers. Furthermore, we are also dealing with a major non-confirmation between the internals and price at both the intermediate and longer-term levels.

As a friend of mine said, "It's not going to matter until it matters and then it's going to matter a lot." I couldn't agree more and we are about to enter into another window this summer in which things could begin to matter a lot. It is for this reason that my Cycle Turn Indicator is so important. It does not care what we think or what the market "should" or "should not" do. It is a market turn indicator and when it turns, it's as simple as following it and what happens here is key.

In the monthly issue of Cycles News & Views as well as in the web based updates I cover the stock market, gold, the dollar and bonds. I report on silver, gasoline and oil when they reach important turn points as well. The Dow theory and statistical analysis provide us with market expectations, but it is the Cycle Turn Indicator that provides us with the turn points. For information on subscribing, please visit www.cyclesman.com.


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