Good Morning. The argument as to what comes next for stocks falls along party lines at this point. The bulls contend that they were tested last week and that the all-important line in the sand held. As such, our furry friends suggest that new highs for the major indices are only a matter of time. Yet on the other side of the aisle, the bears are telling anyone who will listen that the "hopium highs" won't last and a retest of the recent lows is the likely outcome in the next week or so.
So, given that (a) we prefer not to take sides in such arguments, (b) stocks appeared to go into pause mode yesterday and (c) our indicators are fairly neutral at the present time, I thought this would be a good time to check in on our cycle composites.
As I've explained a couple times already this year month, the projection of the Cycle Composite (which includes the 1-year seasonal, the 4-year Presidential, and the 10-year decennial cycles) is one of the inputs to our Market Environment Model. And while I would never trade solely on this indicator, it has proved to be very useful on occasion. As such, I am willing to check in on these indicators on a regular basis.
So far in 2013, the projection for the cycle composite has been pretty darn good. And since 2009, the cycles have been very helpful in calling the major moves of the market. However, during the month of May the market got a bit out of whack with the cycle composite. In short, the cycles called for a pullback during the middle of the month while the indices simply marched merrily higher until the last week.
However, after this brief inversion, the S&P 500 appears (the key word here) to be back on track. Therefore, it might be worth our while to see what the cycles project for the rest of June.
The cycle composite itself (which combines the three cycle projections) calls for a choppy uptrend during the sixth month of the year with stocks moving higher into July. So, if things play out according to the composite, we can expect to see the current sloppy period in the market continue for another couple of weeks. And I'm sorry to say that it looks as if there could be some volatile days involved.
Looking at the composite's components, the one-year cycle calls for a steady uptrend followed by a dip near the end of the month. The four-year Presidential cycle is less encouraging as it projects a lot of sideways action. And finally, the ten-year cycle is the most upbeat and calls for some sloppiness mid-month and then a resumption of the uptrend as the month comes to a close.
The good news is that if we can survive the choppy period that all three cycles project for June, there is a bright light at the end of the tunnel. You see the cycle composite suggests that the first half of July will include some upside fireworks and take the S&P to new highs.
But from there, it may be time to dust off the old risk management strategies as a fairly strong pullback is forecasted for the latter part of July.
After reviewing the various cycles, I will offer the following observations:
With the S&P sporting a gain of +15.2% and the DJIA up more than +16% year-to-date, and more than six months to go before the end of the year, we should probably expect the game to become more difficult at some point soon. So, while the current one-way market has certainly been enjoyable, even the cycles suggest that all good things come to an end eventually.
Turning to this morning...
Disappointment over the Bank of Japan's decision to stand pat with the country's current stimulus plans, spiking bond yields, and fear over what Germany's high court may have to say about the constitutionality of the ECB's unlimited bond buying program (the OMT) has put traders around the globe in a "risk off" mode this morning. All major stock markets fell hard overnight and U.S. futures point to a decline of nearly 1% at the open this morning.
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