Most markets are subject to boom and bust cycles.
A look at a long-term chart makes it quite obvious that the S&P 500 (SNP: ^GSPC) has strictly adhered to a 13 and 7-year cycle.
We don’t know exactly what’s causing such cycles, but if the S&P 500 (NYSEArca: SPY) finds such cycles important, we shouldn’t ignore them.
13-year S&P 500 Cycle
The chart below shows the S&P 500 (monthly bars) since 1973 on a log scale.
It’s easy to spot at least three major tops and bottoms (dashed gray brackets: December 1974, August/October 1987, March 2000) spaced in 13-year increments.
Based on this 13-year ebb and flow sequence, the next top is projected to be somewhere around the year 2013.
7-year S&P 500 Cycle
What about the Great Recession? The 13-year cycle didn’t see the financial deleveraging debacle, which saw the financial sector (NYSEArca: XLF) decline 80%+, coming.
The post 2007 financial deleveraging debacle falls within the 7-year cycle, which has graced Wall Street with its presence every 5 - 7 years – 1974, 1982, 1987, 1994, 2000, 2007.
In fact, in a December 24, 2007 interview with CNBC’s Maria Bartiromo, I recommended to employ strategies that benefit from a topping market. The 7-year cycle contributed to my back-then bearish outlook.
The 7-year cycle suggests that 2013 and/or 2014 will not enter the history books as just an average garden-variety year on Wall Street.
How trustworthy are those cycles? You are looking at the evidence. It’s all here. Whether you consider the cycles credible or file them away as bogus is up to you.
Cycle analysis is easy. In a nutshell, cycles work … until they don’t.
Regardless of its track record, no investor should base investment decisions solely on cycles (or any other single indicator).
What Cycles Can and Cannot Do
An air traffic controller that spots an unidentified object on his radar will certainly keep a close eye on it until he knows what he’s dealing with.
We don’t have to ‘ground every flight’ or sell all stocks, but the 13 and 7 years cycle should be monitored closely on our radar. A cycle high for the S&P 500 (NYSEArca: IVV) will have a similar effect on the Dow Jones (DJI: ^DJI) and every other major index and shouldn’t be underestimated.
As subscribers to my Profit Radar Report know, I always look at dozens of indicators. To confirm or invalidate the cycles I will be looking at breath indicators and key support levels.
New highs with bearish breadth divergences or a drop below key support would suggest that the cycles need to be taken seriously. As always, my real time observations will be available via the Profit Radar Report.
In the meantime, it helps to know and understand which two secret forces (secret because most of Wall Street isn’t aware of them) continue to propel stocks higher.
If or once those forces dissipate, the bearish cycles are likely to take over. The two forces are discussed in detail here:
QE Haters are Driving Stocks Higher
The Secret QE Bull Market Trade Pattern that Almost Never Fails
Simon Maierhofer is the publisher of the Profit Radar Report.
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