While cruising the "blognet" today, I came across this chart which was said to be from Bank Credit Analyst's (BCA) December 2005 issue. If so it would be typical of what I remember of that excellent publication from when I had a subscription ~25 years ago. Even before that, back in the dark ages of the 1950's and 60's, BCA were like the Arab scholars and Chrisitian monks of the middle ages who preserved the wisdom of Greek and Roman antiquity. In their case BCA preserved and annually reviewed Elliott Wave analysis of the major markets, long before Bob Prechter even thought of going to Yale to study psychology, or perhaps even to kindergarten.
A. J. "Jack" Frost, who co-authored the Elliott primer blockbuster with Prechter, was one in a line of BCA analysts who worked with Elliott techniques after Elliott's death.
BCA has normalized SPX from 2002 to now for comparison with the average of all eight prior post bear market bull rally phases. I didn't see BCA's text, so I'm not sure whether by "real" they mean total return with dividends reinvested, or whether they mean inflation-adjusted. But I guess it doesn't matter very much. What we see is that 2002 to now is a good proxy for all eight prior bull-after-bear phases in the first three years from the bear low. Put another way, it isn't "different this time": it's almost exactly the same 
pattern.
pattern. Using a nice little tool called Chart Overlay (www.OmniumSoftware.com), I measure the typical pullback into early 2007 at about 31% of the post 2002 low to 2005(?) high. Assuming that this past week's SPX high 0f 1275.8 holds, this would take us down to ~1120. Actually, based on the seasonal chart odds, I still think Miss Market will dance up until New Year's Eve. But think of a 30-35% retracement of the bull rally, or ~13% decline off the high, wherever it may be. This idea fits well with my own hunch I have outlined over the past month or so.
I mentioned before Bill Hester's article this month at Hussman Funds: "Average Gain in Year Two of Presidential Cycle Hides Important Declines". http://www.hussmanfunds.com/rsi/prescycle.htm Hussman Funds does, of course, have a negative bias over their entire history, which has not, however, kept them from making money. I have some money in their strategic growth fund (HSGFX) to take advantage of their excellent hedge fund approach to controlling risk while making money.
Hester goes over some of the same ground BCA did, but he does it in terms of the secular four year US presidential cycle in which 2006 is year two. It's a short and well-written article, so I won't summarize it here except to say that Hester feels one needs to take valuation into account as far as the size of the pullback is concerned. When valuations are high, as Hussman folk believe, the second presidential year pullbacks are deeper than when they valuations aren't high.
If you tie this and the BCA chart into the annual "learned seasonal" (from www.CSIData.com) which Hester hints at, you can see that we may be on the cusp of the correction in a week or two. The chart is the Dow learned seasonal since 1928, but the 20 year seasonal for Nasdaq100 and the 55 year seasonal for SPX are quite similar: basically downward from early January to late October, then sharply up for two months. 
All three of these "cycle studies" are the stuff of statistical odds which I have gradually gained a greater appreciation for, especially after reading Vic Niederhoffer's "Practical Speculation" which a good friend gave me earlier this year. It is like handicapping a horse race or a football team for betting. You may not always win the race or the game, but it's the way to bet: previous similar places in markets after a bull run, a secular political cycle, and the annual "seasonal" pattern. Then there is all the rest I have written about below....from Paul Kasriel and others.
Recent Comments