Many years ago I was blessed to make the acquaintance of one Samuel J. "Bud" Kress, a stock market cycle expert. Mr. Kress is noted for discovering a set of interrelated daily, weekly and yearly cycles all using the same numerical series. These cycles have their terminus in the number 120 and are based on the Fibonacci sequence. These cycles are known to exert a considerable influence over the stock market, and to a degree, the economy.

The yearly cycles within the series, known as the Kress Cycles, are extremely valuable for an investor to know and use as guides when making long-term investment decisions. They can help investors avoid losing money in bear markets and can help them to increase their wealth during bull markets. Knowing when these cycles peak and trough is important. But even more important is learning the complex interaction among the various cycles within the Kress 120-year Master Cycle.

In this installment we'll look at the components of the Kress yearly cycles and how they influence stock market trends over the longer-term. We'll also look at how these cycles can help keep you on the right side of the market. Of equal importance we'll discuss the limitations of cycle analysis which will help us avoid pitfalls that most cycle analysts seem to fall into.

The Kress Cycles are made up of the following components:

2-year cycle: This cycle is the basis of all yearly cycles within the Kress series. It forms the half cycle of the 4-year cycle and multiplies from that point onward. It bottomed most recently in fourth quarter 2006 and is due to bottom again in fourth quarter 2008.

4-year cycle: This cycle is a duplicate of the 2-year cycle. It's also basis of the so-called "Business Cycle," this cycle last bottomed in 2006.

As of mid-2007, there are *still* some so-called cycle experts out there looking for a belated 4-year cycle bottom this year, if you can believe it. That's' right, these cyclists admit the cycle should have bottomed in 2006 but since they all missed the June-July stock market low last year because they were looking for the 4-year cycle to bottom the fourth quarter of '06 (which it did), they try to excuse it by saying the 4-year cycle hasn't bottomed yet.

As Kress himself has been known to say, "A cycle by definition is fixed in time from its point of origin. This is what makes it a cycle as opposed to a wave." I'd suggest to the cycle analysts who still don't believe the 4-year cycle has bottomed that perhaps they should call they're brand of forecasting "wave analysis" instead of cycle analysis and they can re-name the 4-year cycle the "4-year +/- fluctuating wave."

This gets to the essence of the cycle theory of stock market forecasting, for there are two primary schools of thought when it comes to cycles. The first is that cycles are fixed in time, which in the strictest sense they must be according to the definition of a cycle.

The other school believes that cycles can fluctuate, expanding or contracting in unpredictable ways. The academic-sounding terms they use to justify this intellectual cop-out is "left translation" and "right translation." These are just impressive sounding words used to cover over the fact that, by their own admission, they are unable to nail down the cycles and their interactions with each other (let alone with the stock market). Also, by claiming that cycles can morph into shorter or larger time frames, they always have a convenient excuse when their version of a cycle fails to bottom on schedule.

If we're to remain true to the classical definition of what constitutes a cycle then we must conclude that the 4-year cycle did in fact bottom last fall (even though it hardly registered on the S&P chart). Why the shallow bottom? It was because the stock market had already been massively oversold earlier in the summer from the decline that took place between May and June last year. The internal condition of the market at the June bottom was so extreme, both in terms of the rate of change in price as well as market psychology, that the 4-year bottom had no discernable impact by the time the fourth quarter rolled around (when the yearly cycles usually bottom).

The final "hard down" phase of the 4-year cycle was weighing against equities last spring at any rate and was at least partially responsible for the mid-year decline. As we've seen many times in the past, markets sometimes bottom before the cycles do, especially when market declines are driven extensively by fear and investors begin panic selling. This is something Kress has called "a bottom in price before a bottom in time."

6-year cycle: The cycle last bottomed October 2002 along with the 12-year cycle and marked the formal end of the previous cyclical bear market and the start of the current bull market. The peak of the current 6-year cycle was in 2005. It is next scheduled to bottom in fourth quarter 2008. The 6-year cycle is unique compared with the 4-year cycle discussed above in that the 6-year cycle has a discernible peak of three years (the 4-year cycle's "peak" is simply the 2-year cycle bottom, i.e. there is no peak, per se, in the 4-year cycle). The previous 6-year cycle bottom before 2002 was in 1996. The stock market had a stellar year in '96 from start to finish and the 6-year cycle bottom barely registered in the S&P chart (does that sound familiar in light of the contention by some that "the 4-year cycle hasn't bottomed yet"?)

The point that can be made about any cycle of less than 10 years duration is that when the bottom is made it doesn't necessarily have to create a major dip in the charts. This especially holds true if there are cycles of greater magnitude still rising. It's also true when monetary liquidity is exceptionally high and the supply/demand balance for stocks strongly favors demand. And when market valuation strongly favors stocks over bonds (as measured by the difference in bond yields versus the forward earnings yield for the S&P) then yearly cycle bottoms of less than 10 years duration are sometimes negligible. This has been the case since late 2002 and goes a long way toward explaining why the 4-year cycle barely registered last year and why the 6-year cycle peak in 2005 was also negligible.

Is it possible that next year's 6-year cycle bottom may also turn out to be a non-event? That's impossible to predict from this far out. There are two main keys to anticipating the magnitude or severity a cycle bottom may exert on stock. The first is valuation. If stocks remain as undervalued as they are currently (27% according to IBES) then I'd say the odds favor another shallow cycle bottom. This is something most cycle theorists don't take into consideration when analyzing the market based on the cycles.

The second key is investor psychology. If investors in the aggregate are extremely bullish on stocks (as they were prior to the 1987 crash) then odds are that a cycle peak or bottom will be sharply felt, much to the detriment of the bulls. I bring up the 1987 crash because it was the peak of the 6-year cycle that year, coupled with investor euphoria, which catalyzed the historic market crash that year. Also, the stock as measured by IBES in the summer of 1987 was exceptionally overvalued. This made it all the more likely that the 6-year cycle peak of that year would end in disaster for investors who were heavily exposed to the long side of the market.

8-year cycle: This cycle is essentially a duplicate of the 4-year cycle, which in turn duplicates the 2-year cycle. The last time the so-called 8-year cycle exerted a powerful influence on stock prices was in 1998 when the S&P was down some 20% over a 2-month period. The most recent 8-year cycle bottom was supposed to coincide with the 4-year cycle bottom last fall. I say "supposed to" because it has been called into question whether the 8-year cycle even exists. Kress and I had this discussion last summer and he suggested to me that there probably was no 8-year cycle due to its nature of duplicating the 2-year cycle repeatedly. The most powerful of the yearly cycles in Kress series can be divided by the Fibonacci number three (there is a Fibonacci basis behind the Kress cycles, which we won't go into here).

10-year cycle: This is the only yearly cycle in the Kress Cycle series that is fixed in its peak and trough within any given decade. It always bottoms late in the fourth year of the decade and it always peaks in the ninth year of the decade. The last 10-year cycle bottom was in 2004 and the next peak is scheduled for 2009. This explains why the ninth year of any given decade nearly always sees a major peak in the stock market (also known as the "Year Nine Phenomenon). The 10-year cycle is one of the most underrated of the yearly cycles in my opinion. Investors and analysts alike tend to ignore its influence between the fifth and ninth years of any given decade. Yet when the 10-year cycle is in its rising mode it typically provides a strong positive bias to the market between the x-5 and x-9 years.

In the next installment we'll look at the remaining six yearly cycles in the Kress series and their relation to stocks, bonds, commodities and the economy.