Wednesday, December 11, 2013

Has the long-term cycle bottomed early?

A reader asks, “I was wondering if it’s possible that the long cycles, such as the 60-year cycle, have already bottomed early.  Is that even a possibility within the scope of the cycles?  It appears that the Fed has complete control of the markets right now.   One cannot help but wonder how high they will drive the stock market, and how low they will drive the gold miners.  It would seem that the imbalances are beginning to look a little conspicuous.”

This is a question many investors are asking themselves right now, so let’s delve into it. 

It’s important to note that the 60-year cycle that was referenced above is “fixed” as opposed to dynamic.  This means that its bottom is absolute and can't be moved beyond its standard deviation of roughly 1-2 months.  Therefore it hasn't bottomed yet and won’t bottom until later next year, as per the norm of a yearly Kress cycle.

Now is it possible that the Fed’s extraordinary stimulus efforts in recent years have mitigated the cycle?  Yes it is.  Historically the last 60-year bottom of 1954 saw a similar situation wherein the Great Depression of the preceding decades – and the U.S. government's response to it (namely war-time spending) – essentially ended the depression/bear market a few years before it normally would have ended under the Kress cycles.  

It would be quite a stretch to assert the Fed has complete control of the market.  Yes, it does exercise a rather large degree of control over equities through QE, but when you consider how historically “oversold” the market was in the wake of the 2008 crash the subsequent rally isn’t surprising.  

A greater feat would be if the Fed could prevent another market “melt-up” from occurring.  It’s doubtful the central bank has the prescience to do this, so we may yet see a final sell-off before the 60-year cycle bottoms next year.