This article does not comment on the latest financial chatter from the mainstream media and financial analysts. One gets the feeling that media and financial analysts currently have no answer to anything at the moment.
This post will deal solely with dynamic time-cycle analysis.
Mid-March has always been the predicted window of opportunity for the cycles to move from a short upward phase (that began in late December) into the bearish camp. This update, based on the latest data, is not a fundamentally new forecast. It is a confirmation of the cycles already shown. Knowledge of previous analyses is helpful, so here is a short summary from the February update:
“The final low may not yet have been reached […] short-term daily cycles have exceeded their positive momentum […] by March at the latest, daily cycles are turning negative […] The technical cycle-tuned indicators are showing sell signals. The period until March could thus usher in a further downward movement.”
Securing any long position from that day (Feb. 12) was already the right decision to no longer ride the upswing.
What’s next? Here is the most important bottom line of the time cycles ahead of us into late summer: We are reaching the next point where a confluence of long-term and daily cycles in downward phases will be the predominant condition.
Let’s get back to the cycles analysis desk and review the current time cycles status.
Technical chart update
First, I will start with the technical situation using my two favorite cyclic-tuned technical indicators. I highlighted in the February post that it is the second time since the major top in Nov. 2021 that a sell signal was issued based on the long-term cycle. These are very rare situations. This signal from Feb. is updated below and still valid. The cyclic momentum also made a top in the lower panel and is turning down now. The technical situation has now room for the price to move lower until the next signal will be issued.
Chart 1 (click chart to enlarge): S&P 500 Index with cyclic-tuned RSI (dominant cycle length: 270) and cycle momentum (bottom pane)
Daily SPX cycles update
The S&P 500 index cycles have now both switched to their negative downward phases. They are starting to turn down now as anticipated in previous updates.
Chart 2 (click chart to enlarge): S&P500 with two dominant daily cycles composite model
Apple composite cycle model update
Because we used Apple as a proxy to monitor cycles in the tech sector, let’s review the current state. Since mid 2022, this model helped us project the bottom at the end of 2022 and the upswing in January. Previous projections predicted the top in March. Is this still the case using the latest price data?
The composite cycle top projection has not changed from our earlier composite models. It’s still projecting down into late summer.
Chart 3 (click chart to enlarge): Apple price chart with daily composite cycles model
Financial stress composite sentiment cycle
We also follow the weekly long-term cycles model. The long-term SPX model is still waiting for the major bottom to arrive. So, let’s use another weekly data series for a long-term update. I like the St. Louis Financial Stress Index as a kind of sentiment index on a weekly time scale.
This is the St. Louis Fed Financial Stress Index with cycles analysis and composite cycles model overlay, using dominant 192- and 54-week cycles. Cycles extreme turning points correlate to major market turns (extreme sentiment stress top = market bottom and vice versa). Now in approaching final topping sentiment stress window due late summer (first top) or early April 2024 (second top). (Reading = financial market bottom late summer or early 2024.)
Chart 4 (click chart to enlarge): St. Louis Financial Stress Index composite cycle model (weekly)
SPX vs. financial stress composite sentiment cycle
If we overlay the inverted cycles model from this dataset with the S&P weekly price series, we can observe nice correlation in changes in trend in the S&P weekly data at the turning points of the composite financial stress model.
Here is a composite cycles model taken from analyzing the St. Louis Fed Financial Stress Index (see above) mapped as inverted indicator shown at the bottom of the weekly SPX. It’s projecting a major sentiment cycles top (hint: shown inverted as low) starting July 2023 to April 2024. So, expect a cycles sentiment stress top in late summer 2023/early 2024, which should correlate with a low in major global markets.
Chart 4 (click chart to enlarge): S&P500 weekly with inverted St. Louis financial stress composite cycle model (weekly)
VIX index dominant daily cycle and S&P500 price index
Last but not least, here is a more complex chart. Analyzing the VIX index, we get a ~160 dominant daily cycle. The VIX acts inverse to the S&P price series, meaning that bottoms in the VIX correlate to price tops in the S&P and vice versa. This chart shows the inverted VIX and inverse dominant cycle on top and the S&P chart with highlighted cycle legs at the bottom.
This volatility, or “fear” cycle, has a nice rhythm with the price series, also shows that the current cycle phase is giving a downward cycle to the price series.
In addition to that, we know that the generic character of the market changed since November 2021 from a bull to a bear market. We saw this in the long-term cycles model. We now need to pay more attention to the “cycles within cycles” synchronization. This means that since November 2021, we should look out for cycles downward phases. You can see that until November 2021, the upward swings have been more valid as we have been in the bull long-term cycles since then. Finally, this adds up to another downward cycle to the mix.
Chart 6 (click chart to enlarge): Inverted VIX index (top) with dominant daily cycle and S&P500 price index (bottom) with highlighted cycle legs
The importance of analyzing sentiment cycles of active money managers plays a critical role in assessing financial risk. Dominant cycles in the National Association of Active Investment Managers Exposure Index have been identified with high correlation over the past 15 years. The current state of the dominant cycles indicates a possible reversal for U.S. equity markets.
The Importance of Sentiment Cycles
In 1949, investing legend Benjamin Graham eloquently characterized the cyclical nature of financial markets in his book “The Intelligent Investor”:
“The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism.”
Normally, social mood waxes and wanes positively and negatively. Thus, sentiment waxes and wanes in the form of dynamic cycles. Mood refers to a feeling, emotion, or attitude about something, and, of course, it can have a range of values. Whenever mood is related to corporations or the economy, the character of events will unfold in the related financial assets. Fear and despondency represent one extreme, while thrill and euphoria characterize the other end of the spectrum.
Cycles are the important structure because sentiment does not jump rapidly from one state to another. A change of mood requires time; therefore, sentiment moves in dynamic cycles or waves.The challenge is to spot and predict the extreme turning points observed at market tops (“Maximum Financial Risk” - Euphoria) and at markets lows (“Maximum Financial Opportunity” - Panic).
If you have data sets that provide raw “mood” information related to financial assets on the one hand, and on the other hand have cyclic tools that can decipher and track dominant cycles, we are able to provide supporting market analysis to adjust your active investment risk.
Against this background, a cycle analysis of the NAAIM Exposure Index was performed. The NAAIM Exposure Index represents the average exposure of active investment managers to the U.S. equity markets. A value above 100 indicates leveraged long positions. The raw data of this publicly available index is not predictive in nature. However, the exposure index provides insights into the actual risk management of investment managers. In the case that cycles are found in that dataset, it will allow a prediction of future exposure and risk management efforts of that group.
Our performed cycle analysis for the entire NAAIM dataset revealed two dominant cycles: cycles with a length of 73 and 184 weeks. Both cycles were added to a superposition wave, which simply combines both cycles in terms of their phase, amplitude, and length into one combined wave (Chart 1).
Chart 1: Superposition Composite Cycle (73w + 184w) in the NAAIM Exposure Index, S&P500 Index, Data as of Feb. 1 2021
The composite cycle shown is significant because >90% turning points from the exposure index composite cycle correlate with important market reversals. The composite cycle indicated:
- 2007-2009 17-month bear market during the financial crisis
- 2009 market low
- Short-lived bear market between May and October 2011, which was indicated by the high of the sentiment cycle just before Black Monday on Aug. 8, 2011, when the U.S. was downgraded
- 2014-2015 period began with an indicated sentiment cycle top and resulted in a sideways moving market
- 2016 sentiment cycle low, which indicated the start of a truly remarkable year for financial markets
- Predicting the end of the boom in early 2018, with 2018 being a worse year for financial assets. Since January 2, 2018, the S&P has fallen 8% until year end
- Pointing to the start of the next market upswing beginning in early 2019, indicated by the low of the composite cycle with a gain of +60% to date since the indicated December 2018 composite cycle low
Today, at the time of writing, we have reached the next projected composite cycle high for the NAAIM Exposure Index.
Based on the dominant cycle composite analysis of investment managers’ exposure to the U.S. equity markets shown, the current cycle top and past correlations suggest a trend reversal in U.S. equity markets is imminent.
Lars von Thienen
Mr. von Thienen is founder and CEO of a German-based IT management company. He develops algorithms and software for cycle detection at whentotrade.com and has published two books on cycle analysis. He is a Member of the Board of the Foundation for the Study of Cycles. Appointed by the Minister of Justice, von Thienen has served as a commercial judge for over a decade in Germany. Von Thienen is based in Germany. email: lars[at]cycles.org
- NAAIM Exposure Index: https://www.naaim.org/programs/naaim-exposure-index/
- Cycles App: https://cyclesdev.wpengine.com/
We pulled the major charts from our cycle app. Are we reaching key turning points in major markets? Please check the charts on your own. All charts are simple 1:1 views on the cycle app for every user.
I did a video walk-through in German in the Markus Koch show (German):
"Was sind Zyklen und stehen wir vor einer Trendumkehr?"
Feel free to watch as we go over each chart:
You can download all charts here:
The 170-day cycle, called the sentiment cycle, was initially detected on the Volatility Index (VIX) in October/December 2019. This cycle was published in February 2020 before the drop.
In this graph the VIX or sentiment cycle is opposite the price index (e.g. when the sentiment cycle is low the market is high, when the sentiment cycle is high the market is low). Data as of Feb. 2020:
As seen in the graph below, the 170-day cycle aligns with major turning points in the S&P 500 index for the last 2 years.
Data past Feb. 2020 was not used for the cycle analysis (in light blue).