In my first post here in Dec. ( CSCO Long Term Hurst Cycles) I suggested that the 18 month and 4.5 year cycle low may have arrived mid-Nov. for CSCO and the Nasdaq. Having had a closer look at several aspects of these markets, I have to withdraw that presumption.
I consider 1974 and 2009 as nominal 36 year Hurst cycle lows. I suggested in 2012 that the first 4.5 year cycle from 1974 could prove an interesting guide for last year’s trading. The nominal low for the 4.5 year cycle arrived early at 40 months from the 1974 low, a contracted cycle, which is what I would expect. The first 4.5 year Hurst cycle off a major nest of lows should contract. This then led to a rally to new highs into the 47th month off the ’74 low.
You can debate where the 4.5 year low should be placed in 1978. What’s interesting is that the the 9 year FLD helped to mark the midpoint of that 9 year cycle from 1974 in what could either be a cycle top or bottom. It was at that point that the 4 year cycle reasserted itself to set the low one month later in late 1978.
How does the ’74-’78 cycle compare to the current 4.5 year Hurst cycle? The $SPX bottomed last summer at 39 months and has since rallied to new highs. You’d have a hard time convincing me that we saw a 4.5 year Hurst cycle low last summer. Yet here we are 46 months along with 4.5 year cycle highs printed in Sept. 2012 and we could see new highs again this coming week. As in late 1978, one would expect that the current 4.5 year Hurst cycle should reassert itself sometime in the coming months.
A review of market internals suggests that the November low was only a 20 week cycle low. The NYSE McClellan Summation Index ($NYSI) typically falls to at least -500 for an 18 month low and down near -1000 for a 4.5 year cycle low (in bullish markets). The $NYSI barely broke below zero in November before rebounding strongly. This is not the stuff of 4.5 year Hurst cycle lows.
If there was one stock that I consider a great tell, it’s General Electric (GE). This stock does a terrific job of marking 18 month lows with the market. Yet GE has barely moved off the November lows despite a 130 point rally in the SPX. Of course everything is dependent on the correct phasing, and for now I will defer to the phasing shown below.
Major cycle lows are ahead as we have not seen convincing signs of the 4.5 year Hurst cycle low. What is perplexing is the Russell 2000 ($RUT). What is this index doing breaking to new highs? If I look at past major turning points or cycle highs, the $RUT often provides a false, misleading rally that traps investors. Are we seeing this play out once again?
Time will tell. In the near term I would expect at a minimum a pullback or consolidation to begin this week. At some point 2013 will likely see a substantial top. It could come earlier than I expect and it may be more significant than what most investors are prepared for.
N.B. There is the issue of the extra 18 month cycle seen from 2003 to 2009. A pseudotrend for the ride up into 2007 (Fed credit expansion) had its way with the markets and cycles during this period until the crash into the 36 year cycle low of ’09. Now I expect the 4.5 and 9 year cycles to reassert themselves in the coming year or two. I’ll deal with this in a future post.