The last time we looked at the NDX and CSCO, we considered the Nov. 2012 low as a Hurst 4.5 year cycle low. In retrospect, this certainly appears to be the case and helps to explain the strong rally in US markets from that low. This implies, in the world of J.M. Hurst, that we have now entered the second 4.5 year cycle of a 9 year cycle period which began in 2009.
In the long view, the 2009 low was likely an 18 and 36 year cycle low. US markets have out performed most world markets and have matched the best runs in history. With 2009 as a 9 year low, we should compare similar cycles early in a long secular wave. The two charts below show the $SPX in the 70s and the 80s where both 1974 and 1982 were 9 year Hurst cycle lows. The 1974 low was the last 36 year Hurst cycle low and thus the trading out of this major low is worth a look. In fact, both the 1974 – 1982 and 1982 – 1990 nine year cycle patterns are relevant. Both likely witnessed contracted Hurst 4.5 year cycles similar to what we have seen in present day.
In the 70s, the second 4.5 year Hurst low arrived early at 49 months off of the 1974 low. The index rallied from that low to 64 months before a very sharp correction took hold with a low at 65 months (from the 74′ low), taking back most of the prior year’s gains. This was a severe correction relative to the trading at the time.
The next 9 year cycle which started in 1982 shows much the same pattern. A contracted 4.5 year Hurst cycle low was seen in Sept. 1986 at 49 months from the 1982 low. The $SPX then rose until the 62nd month from the 1982 low and then witnessed the largest crash since 1929. The bottom of that correction was made at the 62nd month with a retest at the 64th month. So in both 9 year cycles shown here, we have contracted 4.5 year cycle lows from which strong rallies emerged followed by severe corrections. One could argue that these 4.5 year Hurst cycle lows, as midpoint to the 9 year cycle in these examples, were in fact straddle troughs.
This brings us to present day. The $SPX has rallied from the 2009 low for 58 months in one of the strongest rallies on record. This 9 year Hurst cycle most likely saw a similar contracted 4.5 year cycle low in Nov. 2012 which was 44 months from March 2009. If the same pattern were to emerge here, one would expect the $SPX to top out soon and correct severely into lows this summer, no later than July or August.
While we have similarities in the pattern of trading in these 9 year cycles, there is another strong argument for a serious correction in Q2-Q3 this year and this relates to the 4 year Presidential cycle. Bob Carver characterized this particular cycle in a private forum this month:
“Dewey found a 46-month cycle (3.83-year) cycle which display 98% accuracy over almost a century span of stock indices (he used the Clement-Burgess Index from 1857 to 1883, the Axe-Houghton Index from 1883 to 1952 and another index from 1834 to 1954). He said, These 46-month cycles were observed to occur at 3-4-4-4-4-4 year intervals and then repeat with the 6 cycles recurring each 23 years.
He noted the cycle was M-shaped, with the second peak higher than the first. He attributed the M-shape to two smaller cycles, at one-half the 3.83-year rythm and another at 1/3 (15 1/3 months). He was able to detect all three of these cycles on a periodigram.
Shirk noted in 1960 that the 3.83-year cycle had displayed 98% accuracy over the 127-year period studied to 1960.”
This 4 year Presidential cycle, which runs 46-47 months, all but disappeared in 2005. While the cycle shows clearly on most DOW stocks with lows in 1994, 1998, and 2002, we never saw an appropriate low in 2006 or 2010. One could argue that this cycle was masked by larger cycles at play, and what resulted in the 2008-2009 debacle. Dewey also believed that although a cycle might disappear from view, it would eventually return with the same periodicity and rhythm as before. It is extremely likely that 2014 will see the return of this cycle which is due for a low in July 2014.
So in sum, when trading the next 20 week Hurst cycle, which is likely to start this week, caution would be advised as many stocks are likely to misbehave as we approach a very volatile spring and summer.