The comment of January 4th from Simon Ward is very welcome:
"'Tom,
I really appreciate the blog - many thanks for sharing your thoughts.
Some time ago you talked about a possible range shift in 2CS and a 1935-37 scenario. Would you mind saying a bit more about why you think the weight of evidence has shifted against this possibility?
I guess this is more or less the same as the Dent scenario:
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BTW, have you seen that Helge Loekke - whom I believe you have mentioned before - is now updating his web-site again?
He is looking for surprising strength into April followed by a (serious?) bear phase.
Thanks again,
Best wishes,
Simon""
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Simon, the 1935-37 scenario was based almost entirely upon a chart pattern. The more I looked at it, the more dissimilar the two times seemed in terms of stock market valuations, interest rates, inflation rates, etc. Valuation in particular is not conducive to a major expansion of prices **barring a hyperinflationary bubble**.
Harry Dent ignores all of that and favors the FED/IBES valuation model, like fellow hyper-bull Don Hays, and an 80 year cycle. Dent does make a good case that the chart pattern of a high level consolidation horizontal channel is a bullish pattern. His favorite is 1923-24 after the post-WWI crash and recovery.
The 77 week cycle has been dominant for a long time now, and except for late March 2000, it has coincided with lows, not highs. Given the four year US presidential cycle, also due this year, I felt that the internal weakness I was seeing in the stocks was compatible with an early 2006 high and possibly a scary decline into late February 2006 when the 77 week cycle would normally be due.
If that were to happen, we could then go on and have a 1935-37 bull market analog. And we may. But I have naturally had in mind what could happen if the stock markets continued to run up into February or March instead of falling. This is where Helge Sundar Loekke's big cycle update fits in and causes me concern. I don't recall ever seeing his projections after last October, so I am really grateful that you posted the URL to his update. His work is another piece of the puzzle, but an important piece, especially as the mometum peak of his master cycle is precisely in the 77 week cycle time. Of course I have no knowledge of how he makes his "soup", but I have always liked it .
I sent Loekke an email overnight, and he confirmed his bullishness which he feels will have the momentum to last into April or May. I sent him the SP500 chart with the 77 week cycle (dash-dot blue vertical lines). He didn't comment on the cycle, but said SP500 might even get up to my red/pink line, which is over 1400!
My belief and bias is that we are in a long inflationary economic cycle wave up from the disinflationary saucer bottom of 1998/99 to 2001/03. This is the Kondratieff Wave, which has been much abused over the past 15 years by revisionists of several types. In the K Waves of the past 200 years, the hyperinflationary component came later in the 20-30 year upgrade. But this is the first possible non-"Western" cycle, so perhaps we will have early hyperinflation instead of late. I still don't think so, although the past few months experience with gold, which I own and won't be selling for years, is trying to convince me otherwise.
If we are to have a meaningful stock market bottom in February or March we must start down soon, and I persuaded myself that we would do so after the normal seasonal high passed for stocks: close to New Year's Day for SPX and Dow and close to mid January for Nasdaq. However, cycles work for years and then they don't work, so the 77 week isn't from sacred text. If Helge is correct and we top in late winter, we could go down until fall and still register a 4 year cycle low and a 2007 bull market. Or we could do a bear scenario.
My approach over the second half of last year has been to hedge both my opinion and my portfolio after being pretty bullish for three years. January 2004 to now has been flat in some ways, although I have made a lot of money in very dynamic niche markets. We are going to break out one way or the other from this fairly flat range. I can make a case for either side, and I can't pretend to know the future, except for the advantage that the long economic wave gives me. Right now I could remove all the hedges I have in thirty minutes and be totally exposed to the long side, or I could double those hedges and be net short. But I don't want to be day trading hedges.
From now until late February is very important as I see it, but it's getting a little late for it to be a major low leading to the 1935-37 bullish scenario.
I like Don Hays who was one of the few who was bullish, if early, into the 2003 low and who encouraged me greatly then, as did Joe Rosenberg of of Tisch/Loewe's/CNA. Hays was short or flat into the 2000-2002 crash and lost his job over his convictions, which lends credibility to his opinions. I read Harry Dent's 2000 book in the late '90's, but it didn't quite work out as he expected, so I feel less confident in reading his work.
Thanks for the comments and questions.
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