Surfin' the wave
Cycles gave us a warning: The worst first four months of a new year since 1939.
What a wave it has been!
We are experiencing the worst first four months of a new year, since the late 1930s!
The S&P 500 lost 14 percent, which was last seen in the comparable period in 1939.
The Nasdaq is down 22% year-to-date. Experiencing its worst first four months of any year since its birth in 1971.
The famed Ark Innovation ETF is down 52%.
Seventy-nine percent of stocks in the S&P 500 went downhill in what was otherwise a particularly good season for the stock market.
Cycles forecasted this upcoming wave back in early January and late 2021. Please check our warning with in-depth analysis reviews, made public before the wave appeared. Now, the facts are in.
The calm is over. The wave has arrived. Did you manage to surf the wave or were you sucked under? Lets wrap up where we are today and what to expect going forward. Cycles might help again.
Long Term Cycles (Weekly)
Financial Stress Index
To begin with, the St. Louis Fed Financial Stress Index has a dominant 198-week cycle that is currently bottoming out and is expected to rise into 2023. So we are still in an important period of very low "financial stress," which leaves room for increasing market anxiety in the months ahead. This by no means points to a current low in the stock market.
The long-term cycles in the global US markets were shown in the October analysis with weekly cycles of 381, 186, 143.
That analysis is still valid today, since it showed a long-term cycle forecast. At the time of that analysis, we warned the public to expect the global market character to change from a positive bias ("green") towards a negative market character starting near the end of 2021. Which was indicated by the red highlighted area, where the start of the downward wave was indicated based on the composite of these three cycles. With this in mind, we must conclude that the current market decline is only the beginning of what will be a new negative period for the markets. We still have room to decline into 2023, which is in line with the current financial stress index.
Lets zoom-in for the current long-term weekly cycles. The chart below shows the current state of the 186 week cycle from today.
One can see that the 186 weeks dominant cycle from the previous analysis conducted six months ago is again still detected today. From a visual point of view, it looks as if the cycle is "pulling the price down like a magnet".
To summarize the situation of long-term cycles:
Long-term cycles were forecast to start declining at the end of 2021. This has now been confirmed by the huge drop in prices. The updated long-term analysis still confirms that these cycles are valid and still active.
Short Term Cycles (Daily)
The long-term projection allows us to keep an eye on the market structure as we now move to the next lower time frame. The daily time frame can give us clues as to where interim lows and highs might occur. In our article, "The Calm Before the Next Wave," we ended the article by showing the 165-day cycle top in January 2022 and forecasting the next intermediate low in mid-March 2022. The forecast could not have been better as we saw a bear market rally in March this year.
So, lets update our cycle analysis and see what daily dominant cycle is found by our cycle analyzer. The following chart shows the current cycle spectrum for the daily S&P500.
Based on the principle of variation, the most dominant cycle length has now morphed from 165 days (in January) to 163 days today. Indicated by the peak in the spectrum. So we select this peak to plot as on overlay on the price chart with the current phase of this cycle:
This cycle indicates that we have now entered a period from March to June where the daily cycle is pointing up. The reason I started with the long-term projection is to make sure that we are aware that this daily upward projection until June is in contradiction to the weekly cycles, which are still pointing down.
Without going into the details of different scenarios. The short read is we might see strong volatility spikes in both directions over the next 4-6 weeks into the month of June until the long and short term cycles align their phases again.
From a technical perspective, the market is positioned to see another push upward now. But due to the long-term negative situation, I would closely watch the technical pattern.
I suggest watching for the point around June when that next phase alignment occurs and the long and short term cycles start pointing down in sync once more. It will be at this point where the downward wave will get its next boost.
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If you are part of the whentotrade community, I made an 60min inside webinar recording with in-depth analysis of the current global US markets. You will be able to access it here.