Up until Friday morning at about 3:00 am Eastern Time, the U.S. stock market appeared poised to make a break for the border. More specifically, it looked like traders had put the worries about the earnings season, Greece, the economic data, and the Fed behind them. In fact, it looked like the historical cycle projections were about to play out – and that dear readers, would have been a good thing.
However, immediately following the announcement that Chinese officials had (a) put new limits on margin trading and (b) allowed for more short selling on the exchanges, traders decided it was time, once again, to go the other way.
Never mind that the S&P 500 was just 12 points from the Promised Land. Never mind that the venerable blue chip index had managed to trade above its 5-day moving average for 9 consecutive days. Nope, when Chinese officials basically announced that things were getting out of hand in their stock markets (the Shanghai Composite Index was up more than 14% in April alone and had more than doubled in the preceding 12 months) well, traders and their computers took the hint.
Just like that, stocks reversed course and markets around the world shed a percent or two in value. And don’t look now, but it appears that the S&P 500 has now embarked on the 11th change of direction so far in 2015 – and the 13th since December 1st. The word you’re looking for here is, choppy.
Where To From Here?
So, with traders once again fretting about anything and everything, the question of the day would appear to be: Where do we go from here?
While I do not believe in trying to predict what Ms. Market (or perhaps more accurately, the algos at the likes of Goldman Sachs, Citadel, and Virtu) is/are going to do next, I have on multiple occasions detailed the eerie accuracy of what we call the “cycle composite.” So, we thought it would be a good idea to check in with the historical cycles for some guidance.
What Do The Cycles Say?
To refresh your memory, the “cycle composite” mashes together three historical cycles (the 1-year seasonal cycle, the 4-year Presidential cycle, and the 10-year Decennial cycle) to create a single composite forecast. And as long-time readers know, it is simply amazing how often this forecast is dead on.
Exhibit A is the chart below. The red dashed line represents the cycle composite’s forecast going back to 2010 and the blue line represents the actual S&P 500.
David Moenning is Mr. Moenning is President of Heritage Capital Research, a privately owned, investment research firm. Heritage focuses on active risk management and an “own the best and ignore the rest” equity selection strategy.
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Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.