Market Bifurcation Continues 3


The small caps, as evidenced by the Russell 2000, continue to show relative weakness with respect to the large caps, evidenced by the S&P 500. While the DOW and the S&P 500 recently hit new daily closing highs, the Nasdaq and the Russell haven’t seen new highs in ten weeks.

From a cyclical analysis viewpoint, the main substantive difference between the Russell 2000 and the S&P 500 is the underlying trend. Both indices are showing a diminution of the amplitude of the 80 day price wave and a fairly large fluctuation in the amplitude of the 20 day price wave over the past few weeks. These amplitude fluctuations will cause cycle to cycle duration fluctuations and may cause pronounced translation effects. The Russell however, unlike the S&P 500, has broken its 20 week VTL (not shown) and may be heading for a lower 20 week low.

ES ##-## (Daily)  3_22_2013 - 5_15_2014

 

TF ##-## (Daily)  3_28_2013 - 5_15_2014

 

 

There is a high probability that the Russell will put in a lower 20 week high in a few weeks. A 20 week VTL break followed by a lower 20 week high strongly implies that 80 week high has been seen. Since the indices are in the second 80 week cycle since the last 4 year cyclical low, such a sequence of events will imply that the 4 year cyclical high has also been seen. Historically small caps have led the market up and down, therefore the S&P 500 will most likely follow suit.

 

William

 


About William Randall

I'm a retired attorney who discovered the fascinating world of the financial markets almost two decades ago. After learning about Hurst, I've spent the last several years honing all the skills necessary to fully implement the techniques he taught.


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3 thoughts on “Market Bifurcation Continues

  • Doc

    Hi William,

    You raise a very good point about RUT. Since you posted this note, RUT took out its Feb lows albeit by a fraction of a point. I don’t know about you, but I currently have the February 5 low labeled as the nominal 80wk low. As such, for RUT to break that even fractionally in the first 20wk cycle off that low is significant in my opinion. Just wondering what your thoughts are on that and when you have the upcoming 20wk low due.
    Perhaps importantly I will note that SML did not break its Feb low as RUT fractionally did.

    All the best,

    Doc

    • William Randall Post author

      Hello Doc,

      I’m watching the relative weakness in the RUT very closely because the current pattern is very similar to the 2007 market highs. The RUT put in a lower 20 week high while all the other indices put in higher 20 week highs before the big drop. Although there are minor amplitude differences between the RUT and the SML, the phasing of the highs and lows is virtually identical. Either one could be the precursor to a significant market high.

      The use of bandpass filters to extract the price waves does not necessarily generate the perfectly synchronized lows of Hurst’s default simplified cyclical model. That being said, the 80 and 40 week price waves are cycling up, but neither prior low phases precisely to the February 5 low, whereas the 10 and 20 week price waves phase very closely to the February 5 low.

      Based on filter analysis the indices have already seen the subsequent 20 week low and are currently cycling up towards a 20 week high. Incidentally there were 12 oscillations of the 20 week wave from the 2007 high to the 2011 high. The upcoming peak is the 12th oscillation of the 20 week wave since the 2011 high so the caution flag is definitely out. Even though traditional Hurst cyclical analysis focuses primarily on the lows, I also find it prudent to keep track of the highs, particularly at 80 week and 4 year highs.

      William

      • Doc

        Much thanks for your detailed response. I find it interesting that you use band pass filters rather than a comprehensive phasic analysis. There was definitely a difference in the methods Hurst discussed in Profit Magic compared to his cyclic course material. You must have coded the filters yourself as I am not aware of them being available commercially. Kudos. I am curious where your filters have labelled the last three 10 wk lows for say the SPX or ES. It appears this latest 10 wk low came early if it has indeed past as it appears to have.

        As an aside I have found cycles to shorten during periods of increased liquidity as we have had the last 5 years. Interestingly this latest shortening may be related to perceived or anticipated injections of increased liquidity by China as well as the EU come June 5.

        Best wishes, Doc