As you know I am a firm believer that the 54 year economic cycle of Kondratieff made its low from 1999 to 2003. The previous top formation ran from 1974-1980. Based upon previous cycles, the next cycle top could be as early as 1999 + 20 = 2019 or as late as 2003 + 27 = 2030. This would depend upon the schematic wave shape of the cycle which I have shown before:
Long term bull and bear markets do, of course, have large and sometimes lengthy contra-trend moves. An example during the great stock bull market from 1982 to 2000 was the 1987-1990 bear market.
During this Kondratieff bull market the prices of crude and finished goods and interest rates will be in a bull trend for a long time to come. But they will have one or more lengthy and painful (for bulls) bearish contra-trend corrections. If we were to take 1999 as the beginning of this bullish Kondratieff cycle, as it was for gold and crude oil, we have already lived through a bit more than 25% of the total bull market for this cycle. Thus it would not be surprising if a larger correction were to occur at any time.
Although there are shorter cycles (Juglar, Kitchin, etc.) which some analysts and historians have used to time or predict these contra-trend or corrective movements within the long cycle of Kondratieff, I do not find them convincing. Also different commodities or finished goods will have different patterns within an overall bull market for physical assets. For example, cotton had four distinct bear moves in the long Kondratieff bull market from 1949 to 1980, one of which lasted four years and another which lasted five years!
There are important lessons to learn from behavior like this:
First, and most obviously, Kondratieff bull markets are not linear. They are volatile. Uptrend lines are drawn through lows. This is almost too simple to mention, but pondering it briefly is worth while. This means there will be lows, and that there will be highs before these lows.
Second, we shouldn't chase after rising prices since we will know that there will be contra-trend bearish periods when the market we missed becomes attractive again.
Third, when prices have risen dramatically we should take some profits from time to time. We are not compelled to buy everything at the very lowest low and hold for two decades to sell at the exact high. We may want to keep a core position throughout, but few will want to sit through multi-month or multi-year contra-trend moves fully invested.
Fourth, for most people it will be too dangerous to short physical assets even in fairly clear cut contra-trend bear moves. The better way to play it for investors, as compared to speculators, is to consider long positions in the dollar and/or in dollar bonds during contra-trend bear moves in long term Kondratieff bull markets. If or when you have taken partial or substantial profits on gold or in energy stocks or real estate, you can begin to watch for times when bonds and the US dollar rally strongly. Normally during the Kondratieff bull market, both the dollar and bonds will be declining. By catching rallies in bonds and the dollar we are making profits during contra-trend moves and also hedging our remaining core positions on gold and other Kondratieff bull market assets.
At this time I can identify price patterns in bonds and the US dollar which could result in intermediate term bull markets for both. These patterns are usually accompanied by extremely bearish sentiment, and it's hard to find anyone who is bullish on the dollar or dollar bonds these days.
I'm showing the dollar via the chart labeled DM_EUR/USD. Western Europe (except Switzerland, Sweden, Norway, and the UK) has adopted the DM_EUR or peg their currencies to it (Denmark). Greece and new world possessions of Euro members also use the Euro.
The governing bearish pattern for the Euro (bullish for the dollar) is a four point expanding triangle **below** a long term high. On the chart the major high was in 1995, and the triangle ("spando" is what Don Wolanchuk calls it) is labelled in large blue numerals. A smaller degree spando below a higher low began last year and has formed its own 4th wave (small red numerals) recently. Even numbers are at the extreme contra-trend spando points and odd numbers at the extreme trend direction spando points. Thus at 4 or 6 points a continuation of the trend which carried into point one is likely to resume. And at 3, 5, or 7 points a reversal to a new trend is likely.
The pattern for bonds is more complex but employs the same principles. The blue numbers of 2001-2002 heralded a continuation upwards, and the 2003 top in bonds could be labeled 5. In 2003 bonds reversed down in a new trend. Then a new 4 point spando was formed under the 2003 high. This was the first such 4 point since 1981! As such it was a very bearish setup. The subsequent small red letters show a 5 point (reversal) into the larger degree blue 4, reinforcing the bearish evidence.
However, while most (estimated at 80%) of 4 point spandos result in a continuation of the trend, 20% do not. And now bonds have put in a smaller degree 5 point. Although it is not required, this new smaller degree triangle or spando (red) is contained by trend lines across the extremes, and bonds have just touched the lower line at the same time as making a 6 point. In a bad week for most assets, bonds rallied two points from about 105 1/2 to 107 1/2, so there is a reasonable chance for a good rally in bonds and lower odds for a longer term reversal upwards. The fact that the dollar and bonds are showing similar patterns while gold and other comodities are looking toppy is helpful.
Recent Comments