Interestingly, the market turned up this year on September 11, which was the 55th calendar day from the July 19 high, 49 to 55 calendar days being a panic or culmination cycle.
However, despite the market's new found complacency, Goldilock may not be out of the woods quite yet. October 4 is seven squared or 49 calendar days from this year's August 16 low. Panicky waterfalls and blow-offs alike many times reverse in the window of this 49–55 day culmination count.
As Mark Twain said, “History, although it may not repeat exactly, often rhymes.” So it will be interesting to see this year if the first week of October is a test high as it was a snap back failure in 1987.
Was this year's capitulation peak in July and spike down in August a mirror image indicating a potential test of the highs in early October to be followed by a decline?
The twenty-year cycle was an integral component in the work of the late, great technician W.D. Gann. Sixty months, or five years, is an important time factor within this twenty-year cycle. For example, in 1992 the low for the year was scored in October. In 1997 the DJIA saw a thousand point drop in October. And, of course, five years later in October 2002 the market clawed out a bear market low.
Interestingly, forty years ago, or two cycles of twenty years ago, in 1967 the market also saw a Red October as the DJIA declined 10% from 943 to 849, into the first week of November. Forty years earlier, in 1927, the DJIA sank from 200 to 180 in the month of October.
The index appears poised for a continuation and an extension to new highs. This job data on Friday could certainly be a catalyst for that kind of move. However, what happens if a market is poised to rally and fails to sustain? So far, the important S&P 1540 level of the June high is holding. However, a break below 1529, the level of the July 20 signal bar sell day, would put the bullish case in serious jeopardy.
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As stocks climb to new highs, let’s look at what the Fed’s rate cuts have really done.
30 year mortgage rates before the cut... 6.375%. 30-year mortgage rates after the cut... 6.625%. Stocks’ reaction... priceless.
Forget about 5-year ARMs and interest-only loans. Those are priced completely differently now and are bones in the sand. A mortgage broker at a big bank tells me business is down significantly with no signs of picking up.
But stocks discount the future right? They must see something that we mortals do not see.
Well, that is what Wall Street tells us. But are not stocks just the amalgamation of investors’ opinions? I have commented before that every rally we see is index-led. Insiders in general are selling, not buying. A healthy rally is built stock by stock where insiders see good future fundamentals. That is the forward-looking part. Index buyers are just putting money to work because in today’s relative world you don’t hold cash.
How about this scenario? Banks are taking the liquidity the Fed is forcing out there through the discount window and repos. After using it to shore up the declining value of their assets, they have excess to lend out. Finding no traditional borrowers that want to buy a house or build a factory, the new rules the Fed has set forth allows the banks to pass this liquidity onto their broker dealer subsidiaries in much greater quantities. These broker dealers are lending thus to hedge funds and margin buyers who are speculating in stocks.
Remember, the Fed is powerless unless it can find people to borrow the credit it wants them to spend. By definition, the last ones willing to take that credit are the most speculative.
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