Saturday, May 4, 2013

Can Bernanke beat the Kress cycles?

A client writes: “Is it possible for the Fed to step on the gas so much that the upcoming Kress cycle bottoms over the next 18 months could be invalidated or drastically minimized?  Right now, we almost have to ignore the cycles and trade based on your momentum tools.  I do understand that all this could change quite rapidly, and that might be the environment we'll find ourselves in soon.

Answer: Yes, it's possible the Fed could sublimate the weekly cycles through its monetary policy for the remainder of this year.  As for next year, I have a hard time believing the Fed could achieve this same result.  For one thing, Bernanke's term expires in January and he is widely expected to step down then.  The next Fed president may not be as loose with monetary policy as Bernanke.

Another consideration is that if things keep progressing the way they have been, the Fed in 2014 will have no reason to stimulate the economy as much as they have in recent years.  It may even begin to tighten depending on the performance of the economy between now and then.

If market history teaches any lesson it's that the yearly cycles always exert their strongest impact during the final year of the bottom.  So with the 120-year cycle bottoming late next year, I'd be very surprised if it's effects weren't manifest in 2014.

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