The Minsky risk call, featured in past reports and media interviews, is now heightened as the S&P 500 reactivates its crash pattern after finally breaking under key support at 4100 (Figure 1). This is further amplified by a broad-based breakdown in major headline U.S. indices such as the Russell-2000 and Nasdaq 100. In terms of behavioral sentiment, the S&P 500 Minsky crash pattern continues to characterize a polarization between buyers and sellers as part of a broadening top, with each higher price high (point 1, 3, & 5) and lower price low (point 2, 4, & 6). Expanding volatility becomes self-feeding. Point 5 is deemed as the “kiss of death” signal. This pattern spans from the prior highs of 2018 and includes the pre-pandemic peak and price exhaustion gap near 3400. It equates to an extended 20% price drop and net peak-trough drawdown of 30% from the all-time highs of 2022.
Currently, there remains a divergence in bearish sentiment versus real positioning with initial spikes in fear indicators, but still no panic, thereby implying further capitulation ahead. A notable example is AAII cash position and allocation into equities, which signals the mood of investors is more bearish than positioning (Figure 2). Global equities remain bearish, marked by the EM top in Q1 2021, the global market breadth and the MSCI World (ex. U.S.) top of June 2021, followed by the major breakdown of growth vs. value in Q1 2022.
Market internals continue to be fragile in the U.S., led by mega cap technology and the ongoing FAANG stocks being de-faanged. The chart breakdown still warns of an extended 40% price drop into pre-post pandemic levels (Figure 3). Watch AAPL, MSFT, and semiconductors for further downside risk.
A key driver has been the prior growth-value rotation during the reflationary cycle of spring 2020. However, in January 2022, the first reversal was triggered on the MSCI World Value chart, which is part of a distributive top phase that is verging on a breakdown under key support (Figure 4). The negative domino effect is also now translating to other sectors, notably steel and miners, with increasing evidence of a top in late cyclical sectors. This would mark an interim top in commodities, marked by energy-oil as the last domino to fall, exasperated by a deflationary bust scenario of the 2022 bull cycle and rising socio-economic concerns.
A key measure of the unwind of selective bubble phenomena and related greed trades will be the completion of a top in Bitcoin as part of the major bear market ahead and potential Darwinian winter period in digital assets over the next few years (Figure 5).
A confluence of market timing headwinds remains, with both seasonality and our composite cycle warning of growing mean-reversion risk into H2 2022 and 2023 (Figure 6). More to follow on seasonality timing patterns in future FSC blog articles.
Author: Ron Willian, FSC Development Director
By Bill Sarubbi, FSC Board Member
May 28-30 is likely a low. The period of May-June, EOM strength will begin on May 31 and run to June 12. This period has been up 64.4% of the time. The expected return is the sixth highest of the 12 months. June is likely to be a positive month. This period of strong seasonality is supported by dynamic cycles. Below, are both the daily and the weekly S&P cycles. The buy signals have been accurate 92% of the time (10 of 12) in the last year. All 6 weekly buy signals have been profitable. The combination of this trio of rhythms will likely propel the S&P to 4250 and higher.
We are thrilled to announce the release of a new upgraded version of the Cycles Scanner, Cycles Scanner: Analyst. Available to Members only, this powerful cycles analysis tool is unrivaled!
When you are a Member, full use of Cycles Scanner: Basic is included in the $150 Membership fee. The new upgraded Cycles Scanner: Analyst offers enhanced features that are essential for advanced cycles analysis.
Special offer: $250 savings for the next 30 days only!
Once you are a Member, the cost of Cycles Scanner: Analyst is $99 a month or $849 for a year.
However, if you upgrade to Cycles Scanner: Analyst by June 25, 2021, you can get the annual upgrade for the extremely low price of $599 for the first year! That is a $250 savings!
Learn more about Cycles Scanner: Analyst
Click here for your discount code and instructions on how to upgrade.
The Cycles Scanner is the best cycles analysis tool on the market today. Don't miss this opportunity!
SAVE THE DATE: On Saturday, March 27 at noon EDT, join us live for a very special episode of Cycles TV. Dr. Richard Smith will interview Jay Kaeppel, Senior Research Analyst at Sentiment Trader.
Kaeppel has over 30 years of experience in options, equity, and futures trading, and as a research analyst, trader, and portfolio manager. He has published four books on trading and writes the monthly Explore Your Options column for STOCKS & COMMODITIES.
Date: Saturday, March 27
Time: Noon EDT
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 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.
Join us live for Market Forecast 2021, a week-long speaker series featuring renowned experts in the world of finance and trading, including Robert Prechter, President and Founder of Elliott Wave International and author of Conquer the Crash, a New York Times bestseller, and Jack Schwager, author of the best-selling series of interviews with the greatest hedge fund managers of the last three decades.
Part of FSC’s ongoing 80th Anniversary celebration, Market Forecast 2021 features one speaker a day for five days, starting on January 18. Presentations start at 4:30 PM EST and will last an hour. You will hear from some of the world’s most celebrated traders and market experts, including:
President and Founder of Elliott Wave International, Robert Prechter’s name is familiar to market observers the world over. Since founding EWI in 1979, he has focused on applying and enhancing the Wave Principle, R.N. Elliott’s fractal model of financial pricing. He shares his market insights in The Elliott Wave Theorist, one of the longest-running financial publications. Prechter developed a theory of social causality called socionomics, based on the hypothesis that events don’t shape moods; moods shape events. He has written 18 books on finance and socionomics, including Conquer the Crash, a New York Times bestseller.
Tom DeMark is creator of DeMARK Indicators and founder and CEO of DeMARK Analytics, LLC. Renowned for their objective and mechanically driven approach to trading and investing, DeMARK studies are designed to identify and anticipate potential price activity in the financial markets. For nearly 50 years he has been developing, trading, and teaching his techniques to institutional professionals. Mr. DeMark currently serves as special advisor to Steven A. Cohen of Point72 Asset Management and has consulted to Goldman Sachs, Steinhardt Partners, Loews Corporation, Citigroup Inc, JP Morgan, IBM, Union Carbide, MMM, Soros Fund Management, Omega Advisors, Charlie DiFrancesca, and more.
Rob Hoffman is CEO & Founder of the largest online investing, wealth, and business entrepreneurship summit in the world, the Wealth365 Summit. He is a fourteen-time international trading champion and has won over sixteen domestic trading competitions, for a total of 30 victories. Combined he has won more onsite, real money, international and domestic trading competitions than anyone in the world. One of the world’s top traders, Hoffman is an internationally recognized speaker, writer, coach, and mentor to retail and institutional clients. He has been featured on ABC, NBC, Yahoo! Finance, Fox, Market Watch, and more.
Professional trader Lawrence McMillan is best known as the author of Options as a Strategic Investment, a best-selling work on stock and index options strategies. An active trader, he manages option-oriented accounts and edits and contributes to his firm’s derivative products newsletters covering equity, index, and futures options. An international speaker on option strategies at seminars and colloquia, he appears on CNBC and Bloomberg TV and is quoted in publications, like The Wall Street Journal, Barron’s, Technical Analysis of Stocks and Commodities, and more. He is the President of McMillan Analysis Corporation, which he founded in 1991.
Jack Schwager is a recognized industry expert in futures and hedge funds. He has written extensively on the futures industry and is best known for his best-selling series of interviews with the greatest hedge fund managers of the last three decades. He is one of the founders of Fund Seeder, a platform designed to find undiscovered trading talent worldwide and connect unknown successful traders with sources of investment capital. Schwager was a partner in the Fortune Group (2001-2010), a London-based hedge fund advisory firm. His prior experience includes 22 years as Director of Futures research for some of Wall Street’s leading firms.
Join us live every day from January 18-22 at 4:30 PM EST. Stay tuned for registration details!
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
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.
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
Topic: Financial Cycles Summit Three Month Review