The Dow Jones Industrial Average was created in 1896 by Charles H. Dow.
Mr. Dow recognized that there were movements of various degrees within the
markets. He described these movements as Primary, Secondary and Minor and he
likened these movements to the action of the tide, the waves and the ripples.
Mr. Dow only referenced three basic movements in his writings, but there are
natural cyclical movements within the market of many many degrees. This
natural cyclical behavior ranges from very short-term intraday fluctuations,
to much longer-term broad cyclical movements that consist of months and even
years.
The primary longer-term cyclical movement within equities is the 4-year
cycle. When I say 4-year cycle, many mistakenly try to tie the 4-year cycle
to that of the presidential cycle, which also happens to be 4 years, but is
not the 4-year cycle which I am referring to. Since the inception of the Dow
Jones Industrial Average there has been 27 completed 4-year cycles that have
averaged 48.07 months from low to low. Like the seasons of the year, cycles
in the market are fluid in that their durations can vary. For example,
sometimes spring comes early and sometimes it comes late, but it always
comes. With the stock market, while cycles of different degrees are fluid and
their duration can vary over time, there are norms and they are without
question quantifiable.
I have included a chart of the Industrials below showing the ebb and flow
of the 4-year cycle since 1896. Because of the amount of data on this chart
and the broad movement from a reading of 32 in 1896 to over 18,000 in 2015,
the magnitude of the advances and declines of some cycles appears minimal,
but based on the relative price action at the time, they are not. For
example, the decline from the 1973 4-year cycle top into the 1974 4-year
cycle low may appear as only a blip on the chart below, but in reality it was
a 46.58% decline.
Of the 27 completed 4-year cycles since 1896, 14 have had a duration of
greater than 48.07 months with 13 having had a duration of less than 48
months. We are all aware of the central bank intervention to save the markets
that began following the 2000 top. As price rose out of the 2002 4-year cycle
low, the intervention that followed resulted in not only what was at that
time the longest 4-year cycle in stock market history, but those efforts to
extend that cycle ultimately resulted in the worst financial crisis since The
Great Depression. Yet, as the 4-year cycle advance out of the March 2009 low
began, the level of intervention only intensified and now the current 4-year
cycle advance has become THE most extended 4-year cycle ever! Now, one may
ask, if the 4-year cycle is fluid and in light of the intervention, how do we
know when this illusive cycle has topped or bottomed? That is a very good
question and it was for this very reason that I developed a set of tangible
and quantifiable parameters that have been seen at every 4-year cycle top
since 1896. It is in turn these tangible parameters that can be used to
identify and quantify the cycles, be it a cycle of normal duration, or a
cycle of short or extended duration.
It is never nice to fool with Mother Nature. Based on history and as was
the case with the last extended cycle into the 2007 top, all efforts to
control, manage, manipulate, negate or extend the inevitable ebb and flow of
a cycle has always failed and it typically proves to only make matters worse
once it does. As a result of the extension of the current 4-year cycle, the
underlying technical, fundamental, economic, social and political environment
in which this extended 4-year cycle has occurred, I believe that this is THE
most dangerous stock market environment since the inception of the Dow Jones
Industrial Average in 1896. All the while, the extension of this 4-year cycle
has created a mirage, an illusion of endless prosperity for the market. But,
based on over 120 years of market history, I believe that the natural force
will prevail and that as was the case with the extension of the last 4-year
cycle, the current extension has only made matters worse.
