By Bill Sarubbi, FSC Board Member
The S&P and NASDAQ indices, both weighted and unweighted, have broken out of consolidations. The cycles for both indices point up, so higher quotes are likely. The prior resistance is now support, and price is sitting just above these support areas. This establishes an attractive reward/risk ratio in each market. Newsletter writers have gone from bullish to very bearish quickly. And now the AAII survey has more bears than any time in the last year.
In the summer of 2024, I noted that the stock market was likely to move higher. However, the big tech leaders were seen to be too extended and due for a correction. If the market was to move higher and the tech leaders were to correct, then other stocks would have to start outperforming, which has been the case. Let us analyze the prospects for these stocks through the use of cycles.
The relative strength of the equally weighted NASDAQ versus the S&P 500 turned up in late December and remains strong. This indicates that the average stock in the NDX 100 is stronger than the cap-weighted S&P 500. The big-cap tech stocks have been lagging while the smaller weights in the index have been rising. The result: Many more stocks are rising, but the equities that have the greatest influence on the indices have lagged. This is in sharp contrast to the situation in 2024 in which only 25% of the stocks outperformed the S&P 500.
The relative strength screen shows that within the NASDAQ 100, the big 8 tech stocks are ranked from number 6 (Netflix) to number 75 (Microsoft). Here are the stocks in relative strength order with the cycles' recommendations in parentheses:
- Netflix (hold)
- Meta Platforms (sell)
- Tesla (buy)
- NVIDIA (sell)
- Amazon (sell)
- Apple (hold)
- Google (sell)
- Microsoft (cycle low in March)
This monthly cycle explains the buy signal on Tesla:
Tesla Monthly Cycle
Here is another picture that explains the sell opinion on NVIDIA:
NVIDIA Monthly Cycle
The top 5 NASDAQ current relative performers are:
- Palantir
- Super Micro Computer
- Axon
- Atlassian
- DoorDash
From these new leaders, here are the stocks that can be added to portfolios now.
Super Micro came down hard, bottomed, and is now giving longer-term buy signals, supported by rising cycles.
Super Micro Daily, Weekly, and Monthly
Atlassian features technical strength and a rising monthly cycle.
Atlassian Monthly Cycle
Bill Sarubbi Bio
cyclesresearch.com
Bill Sarubbi obtained his BS in 1971 and his MBA in 1972 from NYU, becoming a member of the Foundation for the Study of Cycles in the same year. He trained as a therapist under the direction of Dr. John Pierrakos in New York for nine years. From 1972 to 1990 he worked on the buy and sell sides of Wall Street as an analyst with the Value Line Investment Survey, as an institutional broker, and as a technical strategist with PaineWebber. From 1990 to 2004 Sarubbi was with the Abu Dhabi Investment Authority, where he was a technology fund manager, North American strategist, and member of the currency hedging committee. Since 2004 he has been operating his own money management and consulting service. In the course of his work, he developed unique market analysis software. Sarubbi is a Forbes contributor and is active in groups that focus on the future and on cycles, including the Kenos Circle, a Vienna-based group of futurists. Sarubbi is based in Vienna.
NOTE: This article is intended exclusively to provide information and education to help individuals better understand cycles and the markets. However, this information is not to be construed as professional advice as to the buying and selling of securities or other investment instruments. In no event does the host express any opinion with respect to, or make recommendations regarding, the purchase or sale of any particular security or other investment instrument. There is a very high degree of risk involved in trading securities, and buying or selling decisions are solely within the personal discretion of each individual.
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!
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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
Link: YouTube.com/c/FSCTV/live
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://cyclesdev.wpengine.com/
To download Dominant Cycles Report by Lars von Thienen, click here.
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:
Monday
Robert Prechter
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.
Tuesday
Thomas DeMark
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.
Wednesday
Rob Hoffman
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.
Thursday
Lawrence McMillan
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.
Friday
Jack Schwager
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!