Market Cycles update Oct 29 - Cycles Weekly

Will the market withstand the headwinds?

© Photo by Lars von Thienen

Companies have already been hit by the downturn in recent months. So where do we find ourselves in the current cycle?

Intel rallied this week ( INTC 0.00 ). So does the broader market with S&P 500 counting +6%, and the NASDAQ Composite counting +2.8% gains for the week.

So really, all lights back on green?

Have we seen the beginning of a sustained rally with a positive economic outlook in the last two weeks that makes you want to get back into equities?

Well, cycle analysis makes me doubt that and I don't buy the current ‘rally’. If you listen to the earnings announcements, you hear the theme over and over again, "We still face economic headwinds as we go into next year." Intel, like many other companies, plans significant cost cutting, including a "significant number" of layoffs.

As Pat Gelsinger, CEO of Intel, has phrased it:

‘It’s just hard to see any points of good news on the horizon.’
Pat Gelsinger, CEO of Intel

It has yet to be proven that this should be a ‘rally’?!

If you just look at the FAANG index, I would wonder anyway where the rally is that everyone is talking about? Nothing more than a “blib”?

FAANG Index - Where is the current “rally”?

Other sectors at least survived the third quarter more or less well. But if we're already seeing a turnaround among the big digital heavyweights, will that pass other industries by without a trace?

Ok, I am not trying to decipher the fog of news here. There are more knowledgeable stock market experts than me to explain the relationship between volatility, dollar strength, bonds, yields, quarterly results and stock price movements. Complex interactions are at play all around here.

What we are here to do is to monitor the cycles. So let's get to work.

Long-term cycles (weekly)

The long-term dominant cycles, which I continuously published here since a year ago, show us where we are in the long-term cycles perspective. These cycles have helped us the identify the fundamental change the markets undergo already back in October 2021.

This was the original post back in October 2021. S&P 500 trading at 4470 at that time. It was a bold forecast during that time to project the “uptrend” is ending and will roll-over into a longer bearish period. See the original post here.

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Cycle composite projection posted October 2021

The cycle shows that we have not reached the bottom and that this cycle is in a longer down-swing now. All attempts to the upside would be limited according to the longer-term picture.

The chart #2 shows the most dominant weekly cycle based on the latest stock market data. So, here is the cycle model with current data zoomed-in:

Dominant Cycle Analysis from Oct 2021 with updated price data until 26th October 2022 (light blue price data is out-of-sample and was not used for the cycle model)

Running on rails. It looks like the cycle composite works like a magnet to price. And, more important, we did not arrive at the projected down window. The cycle model low is projected for early- to mid 2023.

Now, lets update also the cycle analysis with its most dominant cycle using current data.

Cycle Model - updated 29 Oct 2022 - Dominant Weekly Cycles 184w (prev. 186w) and 397w (prev. 381w)

As this model seemed to guide us very well since Oct 2021 and the updated model has just small cycle variants, we stick to it. The other long term charts I showed here on the blog are still valid. For example the St. Louis Fed Financial Stress Index is still in a bottoming area, which is a place for market tops, not important market bottoms.

This week, we received new data from the housing area. Which is always a leading indicator for the economy. Lets see what housing data and cycles might tell us.

First, in regards to the cyclic model, lets recap the cycle composite model posted in the blog some time ago:

This model is still on track according to latest data. New home sales in the United States fell another 10.9% in September of 2022. Which indicates the recession is just around the corner, not avoided. Even more interesting is the cyclic picture looking at the NAHB Housing Index. The NAHB index for traffic of prospective buyers dropped to 25. Like falling off a cliff.

The dominant cycles model indicated a possible low or bottom around 2023. But even more important is the cycle model top back in November 2021. The NAHB is a leading indicator and can act as a guide for US jobless claims. Prior lags between housing and the labor market were 6 to 24 months.

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So the current drop in the housing market could lead to even higher negative impacts on the economy with higher jobless claims and unemployment rates. Bringing another positive argument that the larger downward cycle has not ended.

Short-term (daily)

Lets move to the short term, daily pictures.

The following daily cycles model was done back in August for Apple.

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The new price data is shown in light blue after the fact. Also, the top was projected right on time. Still room to go into december.

Dominant Cycles Model for Apple, Composite Model done in August 2022, price updated to October 26 2022

Updated Apple Cycle Model with current data:

The dominant cycles are still there, just slightly changed from 176 to 172, from 136 to 135 and 81 to 79 days. Fairly stable cycles model.

Interesting to see that the cycles model now shows a “blib” until early November. However, the larger low is still projected for end 2022 with room to go.

In addition to that, lets just see the latest technical cycles I shows you in posts from the past week, just updated with latest data.

The TRIN Index proved to be a valid level for past bear market rallies. The current one still needs to be proven.

The performance divergence between bonds and stocks is also not resolved yet, which also projected the end of bear market rallies at extreme levels. For sure, it could be resolved by bonds ralling. But in the past it signaled the stocks have run to far. And by the way, there is a nice 50 trading-days pattern visible.

Here is the updated daily VIX cycles model, which also still has room to move up (=stocks move down) until late November.

Interesting to note in the VIX model is, that the 50-days cycle seen in the Springboard Delta chart with the performance divergence of bonds/stocks, is also present in the VIX dataset (49-days). The 168 days cycle is the most dominant. So the cycle model is based on both, indicating more room for the VIX to the upside. However, if you discount the longer term dominant cycle of 168 days, the picture still indicates possible more room for the VIX to move down into early November, before starting to rally again into end November (see short term analysis below).

With bonds and equities recovering plus easing volatility, technical indicators right now suggests that the counter-trend rally may continue.

[Update] Current latest daily short-term cycles

Here are the latest short-term cycle results using the SPX and the VIX, which underpin that the current rally could last another 1-2 weeks until early to mid November:

Short-term daily cycles on the S&P 500 with 82 and 51 trading days cycle length (as of 28 October 2022)

And here are the latest VIX cycles:

Short-term daily VIX cycles (82,73,55,50 Trading Days) as of 28 October 2022

As always, we show you the cycles, you draw your conclusions.

Have a great weekend,

Lars

Member of the Board
Foundation for the Study of Cycles

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The publisher does not warrant the accuracy or completeness of the information provided on this site. All statements and statements contained herein are the sole opinion of the author.

Lars von Thienen / this blog website is a publisher of scientific cycle analysis results for global markets and is not an investment advisor. We do not provide personalized or individualized investment advice or information tailored to the needs of any particular recipient.

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1. Original cycles post from 11. October:

Weekly S&P500 cycles rolling over

2. https://www.spectramarkets.com/issues/am-fx-housing-and-cycles/

3. Apple projection from August:

Dominant cycles speak one message: major trouble ahead for global stock markets (+ audio)