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A growing number of market technicians, some of them highly respected, are
forecasting a sharp correction in the January-February time frame. In
light of a number of recent inquiries I�’ve had regarding this
possibility, let�’s examine this topic.
Tom DeMark is one of Wall Street�’s most esteemed technical analysts.
He recently uncovered an analog between the current stock market and the
run-up to the 1929 top. Tom McClellan published a chart comparing the
two markets in a recent article. The theory behind price pattern
analogs is that �“similar market conditions can produce similar patterns�”
as McClellan put it.
One problem with comparing stock market patterns from different periods is
that the underlying conditions behind the patterns are often
dissimilar. For instance, the run-up to the 1929 high was fueled by
widespread speculation from the general public. Today the public is a
virtual non-participant in the market�’s run-up to new highs.
Also, as McClellan himself points out, the Federal Reserve consistently
raised the benchmark interest rate several times leading up to the 1929
crash. Today, of course, the Fed funds rate is hovering near zero
percent.
Technicians like DeMark and McClellan who foresee a market top in
mid-January base their prediction not just on various technical disciplines,
but on a more mundane set of reasons. For instance, next month is when
the current congressional agreement on the debt ceiling comes up again for
discussion, which in turn could cause investors to reassess their enthusiasm.
Concerns over health insurance policies and the implementation of the
Affordable Care Act could be another investor concern around
mid-January. This is what the technicians who argue in favor of a
January top believe at any rate.
Another consideration for the projected mid-January top is found in the
following words of McClellan: �“The Fed is not likely to yank away
the punchbowl at its Dec. 17-18, 2013 meeting, just a week before Christmas,
but the Jan. 28-29, 2014 meeting is a greater possibility for finding out
that the markets may have to start to quit the QE addiction. And the
FOMC's March 18-19 meeting fits right about where the Black Thursday crash of
1929 fits into this analog.�”
My assessment of the mid-January top scenario is decidedly different from
that of the above mentioned technicians. There are several key short-
and intermediate-term cycle peaks scheduled for January, culminating with a
Feb. 21 cycle cluster on the Kress cycle calendar. This makes it
possible a sharp correction beginning in January and lasting into later
February, but without a specific catalyst a crash is exceedingly hard to
predict.
Certainly the market's internal momentum is deteriorating, but that alone
isn�’t sufficient to expect a major crash. In order to have a
sharp sell-off like the one DeMark, McClellan, et al predict we'd likely need
to see a major worry �– probably news-related �– take center stage
early next year.
Another consideration for a significant market decline in 2014 is the �“melt-up�”
scenario discussed by economist Ed Yardeni and others. Should the stock
market continue its advance unabated into Q1 2014, conditions may well be
ripe for a major top by the end of the next quarter. The weekly
configuration of Kress cycles would support this, not to mention the coming
final �“hard down�” phase of the longer-term yearly cycles
scheduled to bottom in late 2014.
The only other ingredient necessary is greater public participation in the
stock market. Michael Sincere of MarketWatch.com touched on this in a
recent column. He asks where are the �“intoxicated investors, a
buying frenzy, over-the-top speculation, and a get-rich-quick mentality?�”
He rightly points out that these are necessary accompaniments to a market
bubble.
A continued rally to new highs, however, will likely solve this �“problem�”
by forcing sidelined investors into becoming market participants for fear of
missing the proverbial �“only game in town.�” Thus as we�’re
about to enter 2014 the stage may be set for a final melt-up stage to set up
a crash later in the year.
Kress Cycles
Cycle analysis is essential to successful long-term financial
planning. While stock selection begins with fundamental analysis and
technical analysis is crucial for short-term market timing, cycles provide
the context for the market�’s intermediate- and longer-term trends.
While cycles are important, having the right set of cycles is absolutely
critical to an investor�’s success. They can make all the
difference between a winning year and a losing one. One of the best
cycle methods for capturing stock market turning points is the set of weekly
and yearly rhythms known as the Kress cycles. This series of weekly cycles
has been used with excellent long-term results for over 20 years after having
been perfected by the late Samuel J. Kress.
In my latest book �“Kress
Cycles,�” the third and final installment in the series, I explain the
weekly cycles which are paramount to understanding Kress cycle methodology.
Never before have the weekly cycles been revealed which Mr. Kress himself
used to great effect in trading the SPX and OEX. If you have ever
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The book is now available for sale at:
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Order today to receive your
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Clif Droke is a recognized authority
on Kress cycles and internal momentum, two valuable tools which have enabled
him to call most major stock market turning points from 1997 through the
present. He is the editor of the Momentum Strategies Report newsletter,
published three times a week since 1997. He has also authored numerous
top-selling books, including his most recent one, �“Kress Cycles.�”
For more information visit www.clifdroke.com
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