Dominant cycles speak one message: major trouble ahead for global stock markets
August Global Stock Market Cycles Update (Key Charts)
The purpose of this article is to highlight some important charts on the major dominant cycles. The short summary is that currently no single cycle exists to support an uptrend or positive hope for equities. All of the analysis comes together as a single message:
At this point, essentially every dominant cycle is pointing back down, pointing to further bearishness through the end of the year.
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1. Long-term sentiment (Financial Stress Index)
If we use the St. Loius FED's Financial Stress Index to analyze long-term financial stress sentiment cycles, we can see an active 197-week cycle in this series. Currently, a significant low in financial stress is indicated at the end of 2021 and an upswing in financial stress is forecasted to last until mid 2023. Financial crisis lows correlate with U.S. equity market highs and vice versa. The reading of this cycle corresponds to a peak in the stock market, not a trough. This suggests that financial stress is likely to increase in the coming weeks and months, causing difficulties for the stock market.
The following chart shows a mapping of the turning points of this financial stress cycle on the S&P500 index:
2. “Fear” sentiment cycle (daily) - VIX Index
Another measure of sentiment is the VIX index. It is often called the "fear" index because the lows of this index correlate with the highs of the market and vice versa. We can use this data set to drill down from weekly sentiment to daily sentiment.
The cyclical analysis shows a 171-day cycle in this data set. We can see that the current uptrend in the stock market from May to August correlates with this dominant cycle period from its peak to its trough. The current state with the cyclical low expected by the end of August and the next upswing in the VIX index expected until October indicates another bearish phase for the stock market.
Both sentiment cycles, the weeky Financial Stress Index cycle and the daily VIX cycle suggest headwinds for the stock market.
3. Leading daily stock market cycles (Apple)
Now, lets move to the raw stock market prices themselfs instead of just using related sentiment datasets. Lets pick Apple as “key stock barometer” because it is
the world's largest company by stock market value and
has the highest weighting for any stock in the S&P 500 index.
The cycle analysis for this stock reveals 3 dominant cycles with a length of 176, 136 and 81 days. The composite cycle model is shown in the next chart.
The dominant cycle model projects the next important downswing in this stock starting now and last into the end of 2022.
If you set this into context with the cycle analysis done on the inverted yield curve:
All cycle analysis comes to one single conclusion which should be obvious. It is not often that different datasets and long-& short term views form a cycles-within-cycles alignment with that clear message.
Thank you Lars.
Thanks a lot for sharing your knowledge and thoughts.
Refering to your cycle analysis on the inverted yield curve, I wonder myself if the past four turning points in both yield curve and the cycle model are located more or less at the top of S&P 500 and if the recent, already realized decline in S&P 500 by approx. 20% would still be extended as the cycle model is projecting (or if this time the yield curve is "following" the S&P 500).
I would highly appreciate if you share your thoughts on this. Thanks a lot.