Tuesday, March 11, 2014

Cycles in the eye of the beholder

My former Merrill Lynch colleague Walter Murphy tweeted the following today:

Walter is a highly experienced technical analyst and his tenure at Mother Merrill dates back to the days of Bob Farrell. His specialty is cycle analysis and Elliott Wave Theory, which is a topic that I never understood well because the sensitivity of EW analysis to initial conditions.

20-week cycle validated?
With the caveat that the market is affected by many cycles and the effects of  a cycle low or high may be overwhelmed by the effects of other cycles, I present below a five year chart of the SPX with a 21 week cycle (as per Walter's observation that the 20 week cycle lasts 21-22 weeks). The vertical lines are the 21-week "cycle lows"; the blue arrows represent "good" buying signals at each of those lows where there was little or no downside for the next 4-6 weeks; and the red arrows represent "bad" buying signals where the market went on to see significant downside for the next 4-6 weeks. As the chart shows, there are significantly more blue arrows representing "good" buying signals than red arrows indicating "bad" signals.

I still don't understand cycle work well, but these results are intriguing. Walter's other cycle work appears to suggest a bullish bias based on another recent tweet:

In addition, Christopher Mistal of Stock Trader's Almanac showed that we are moving into a seasonally bullish period for a mid-term election year:

My own breadth studies (see What bad breadth?) suggests that, despite the overbought nature of the current equity market, stock prices can move higher. Walter's cycle analysis and Mistal's seasonal patterns are another pieces of the mosaic that confirm that bullish view.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Unknown said...

Cam, isn't this a type of analysis that would be plagued by erroneous conclusions based on where you are in the cycle?

I would like to see the results from 2007-2009. I think the cycle would prove less than profitable or entirely meaningless.

In a bull market, it is probable that even entering at random along the way, more often than not you would make money on your trade.

Given that we have been in a massive bull market for 5 years, I'd be very surprised if a random number generator couldn't provide the same results.

Whether this means anything going forward... I'm not so sure it's meaningful analysis, as opposed to coincidence related to the bull market.