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ABSTRACT
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
REFERENCES
- NAAIM Exposure Index: https://www.naaim.org/programs/naaim-exposure-index/
- Cycles App: https://cycles.org/
To download Dominant Cycles Report by Lars von Thienen, click here.
We are thrilled to announce the release of the second issue of the revived Cycles Magazine, a special 80th Anniversary edition.
Cycles Magazine is a quarterly publication that showcases the work of Members and cycles researchers from all over the world. It is exciting to see Members submitting their cycles research. We hope you will participate by submitting your research.
Cycles Magazine is our commitment to preserve and sustain the heritage of the FSC and advance Founder Edward R. Dewey’s original vision of the FSC as a not-for-profit institution dedicated to discovering and promoting a new science of cycles.
In this issue, read:
- Two articles by Edward R. Dewey: Stock Prices and Space and Stock Prices, Mercury and Space
- An update of Dewey’s articles by Bill Sarubbi: Stock Prices, Mercury and Space in 2021
- Theodore Modis: A Hard-Science Approach to Kondratieff’s Economic Cycle
- Edward Samokhvalov: Geomagnetic Butterfly Pattern
- Andrew Pancholi: Forecasting Long-Term Market Cycles
- Michel Jacquemai: The Curious Cycle of Pestilence
- Lars von Thienen: Asymmetric Business Cycles and Skew Factors
Enjoy! And let us know your thoughts.
Click here to learn more about submitting an article for consideration.
Click here to read Cycles Magazine.
Registration is now open for the Science Cycles Summit.
As part of our celebration of the FSC's 80th Anniversary, FSC Board Member and Science Director, Ray Tomes is hosting the Science Cycles Summit live on Saturday, January 16, 2021. This all day event will feature presentations from luminaries in the field of cycles science. All times are EST:
- Noon: Ray Tomes - The 586-Million-Year Cycle in Geology and Climate
- 1 PM: Chuck Blatchley - Beginnings of Wave Mechanics
- 2 PM: Ed Oberg - 61 Lunar Nodal Cycle
- 3 PM: Leslie Carol Botha - Women: An Overlooked Biomarker in the Scientific Study of Cycles
- 4 PM: Pavel Kalenda - Solar Cycles, Geology, and Climate
- 5 PM: David Katzmire - The Cycles of Change: Patterns of World History
- 6 PM: Ray Tomes - Waves of Galactic Clusters and the Hubble Constant
Click here to register today! We look forward to seeing you.
Join us for FSC TV Live this Saturday, December 12, at 11 am EST. Dr. Richard Smith, Chairman of the Board and Executive Director, talks to Board Member Bill Sarubbi about current outlooks for the S&P and gold.
Date: Saturday, December 12
Time: 11 AM EST
Topic: Current Outlooks for the S&P and Gold
Link: youtube.com/c/FSCtv/live
The last link is a good composite cycle going back over a year and a half. I’m not saying that BTC-USD is about to crash, but anyone buying BTC-USD today should be just fine with a 50% correction and holding for another 3 years.
42-day cycle:
https://mydata.cycle.tools/study/wYAWYBB30
34-day cycle:
https://mydata.cycle.tools/study/5y85y2jaW
93-day cycle:
https://mydata.cycle.tools/study/5y85y2jaW
Composite cycle:
https://mydata.cycle.tools/study/vPz8Pdok8
On Saturday, January 16, 2021, FSC Board Member and Science Director, Ray Tomes is hosting the Science Cycles Summit.
This all day event will feature presentations from luminaries in the science of cycles, including:
- Ray Tomes: Professor Afanasyev and the 586-Million Year Geological Cycle
- Dr. Chuck Blatchley: Quantum Physics Vibrations
- Ed Oberg: Lunar 18.6-Year Cycle and Natural Disasters (Iasoberg Model)
- Leslie Botha: Women's Cycles Upset by Modern Society
- Pavel Kalenda: Long Solar Cycles and Geology and Climate
- David Katzmire: Historical Cycles of Change
- Ray Tomes: Waves of Galactic Clusters and the Hubble Constant
Join us live on Saturday, January 16, 2021. After the summit, all talks will be available the FSC’s YouTube channel.
Presentations will be about 45 minutes followed by question and answers. Presentations and presenters are subject to change. Stay tuned for more information, including registration details.
Click here to subscribe to Cycles TV so you don't miss anything!
Join us live on Cycles TV this Saturday, November 14, at 1 pm EST.
Dr. Richard Smith, Chairman of the Board and Executive Director, will take a look back at the Financial Cycles Summit and see what we got right, what we got wrong, and where we go from here. He will also update viewers on the progress of the FSC rebuild.
Date: Saturday, November 14
Time: 1 pm EST
Link: YouTube.com/c/FSCTV/live
Topic: Financial Cycles Summit Three Month Review
Chick here to watch the Financial Cycles Summit.
We are pleased to announce the debut of Cycles Market Report, a weekly discussion on Cycles TV of cycles analysis using current market data.
Join us live every Monday at Noon EST, starting November 9, 2020.
Presented by FSC Board Member Lars von Thienen, this weekly session is a live review of datasets using cycles analysis methods. The purpose is to review current cycles to foster a better understanding of how to apply cycles analysis.
When: Every Monday
Time: Noon EST / 18:00 CET
Where: YouTube.com/c/FSCTV/live
We are thrilled to announce the relaunch of Cycles Magazine: The Official Journal of the Foundation for the Study of Cycles, a quarterly publication that will showcase the work of Members and cycles researchers from all over the world.
Cycles Magazine is a demonstration of our commitment to preserve and sustain the heritage of the FSC as it pertains to financial technical analysis as well as a restoration of Founder Edward R. Dewey’s original vision of the FSC as a not-for-profit institution dedicated to discovering and promoting a new science of cycles.
Modern life continues to accelerate, and the FSC continues to adapt. But it is also part of the FSC’s role to encourage us to take a step back and look at the big picture. That is the primary purpose of Cycles Magazine.
In this issue:
- Bill Sarubbi approaches cycles from the viewpoint of his former Greenwich Village neighbor, George Lindsay.
- Tony Plummer provides unique insight into a W.D. Gann-derived cycle that has application to both markets and the economy.
- Andrew Pancholi applies cycles expertise to the periodicity of pandemic outbreaks, a particularly relevant study given the current global outbreak of COVID.
- Theodore Modis relates sunspots to the U.S. GDP and the financial markets, indicating, “A correlation has been observed between the U.S. GDP and the number of sunspots as well as the Dow Jones Industrial Average and the number of sunspots.”
- John Casti explores the role of collective feelings or mood in human affairs and how this impacts cycles.
It has been nearly 25 years since the last issue. We hope you enjoy and share your thoughts with us.
Click here to learn more about submitting an article for consideration.