Thursday, January 30, 2014

Kress Cycle forecast for 2014

At the start of every New Year we always publish a Kress cycle “echo” forecast for the year ahead. For the benefit of those unfamiliar with a Kress Cycle “echoes,” these stock market patterns are based on four key yearly equity market rhythms. These rhythms tend to repeat and have therefore been invaluable in providing a rough guideline or “road map” for what to expect in the coming months.

What exactly are Kress cycle echoes? Quoting at length from chapter 4 of the book on Kress Cycles: “In any given year, one or more of the Kress Cycles is dominant. Market moves are determined by the actions of the cycles, whether the cycles are in the peaking or the bottoming phase and it’s our task to ascertain which of the multiple cycles are most dominant.

“In 2008 it was the simultaneous peak of the 12-year cycle and the bottoming 6-year cycle which exerted a profound influence over the market. In 2009 the most dominant cycle was the 10-year cycle, which peaked in the late September/early October time frame. One of the things I’ve learned from Mr. Kress is that while the peaks and troughs of the various yearly cycles are fixed in time, during any given year one can use certain key cycles as “mirrors” or echoes if you will, of the same cycle in a previous time frame. Those key cycles, according to Mr. Kress, are the 6-year, 10-year, 30-year and 60-year cycles.

 “With these four cycles we can look back at the comparable time frame and make important observations about past market patterns in relation to today’s market action.” [Pg. 83, Kress Cycles]

Let’s start with a review of last year’s echo analysis. The Kress cycle echo for 2013 was based on the years 2006 (6-year rhythm), 2003 (10-year rhythm), 1983 (30-year rhythm) and 1953 (60-year rhythm). Based on an analysis of these four rhythms, here’s what I concluded in the January 2, 2013 report:

“The 6-year rhythm…warns us to be especially wary of increased market volatility in February-March, the August-September period, and October-November. Of immediate interest, the dominant intermediate-term weekly Kress cycle is scheduled to bottom in March 2013, which increases the odds of a February-March correction for stock prices.”

As it turned out, the February 2013 correction was muted by the Fed’s vigorous effort at stimulating demand via its quantitative easing (QE) policy. A minor pullback can be seen in the S&P 500 chart for February 2013 during the period of the interim weekly cycle bottom, but it wasn’t as serious as it would have been under normal circumstances (i.e. without Fed intervention).

The anticipated August-September correction materialized, as you can see in the following chart. This was a product of the Kress cycle pattern echoing from the years 1983, 2003 and 2007.

There was no correction in last year’s October-November period, however, due to the market’s exceptionally strong internal momentum profile heading into the fourth quarter. In retrospect I erred in my expectation of an October-November 2013 pullback: in two of the four historical “echo” periods for last year the market actually made gains in the October-November period. These include the years 1953 (60-year echo) and 2003 (10-year echo). Thus the odds of an October-November 2013 market correction were actually only 50/50.

That was the year that was. Now let’s turn our attention to the year that is, namely 2014. The old saw that “No two markets, like snowflakes, are never exactly alike” should be kept in mind here as a disclaimer, but there is a cyclical basis for a similar pattern occurring this time around. In the past we’ve talked about the Kress cycle echoes which tell us that the stock market performance of any given year tends to loosely resemble the performance of the previous 6, 10, 30 and 60 years previous on an aggregate basis, with a special emphasis on the 60-year-ago period….[deleted in fairness to subscribers]

….What the above chart tells us is that the year 2014 has the potential to be an extremely volatile one – much more so than any of the previous five years since the post-credit crisis recovery….

[To read the entire 2014 forecast issue, subscribe to the Momentum Strategies Report today.]