While we wait for the next headline or tweet storm, I thought this might be a good time to check in on how the market is faring relative to the projection made by Ned Davis Research’s “Cycle Composite.”

Longtime readers are likely familiar with my love affair with historical cycle composite projections and how the composite is constructed. If you are one of those with high familiarity, feel free to skip the next paragraph.

However, if you are new to my sometimes-meandering market thoughts, you should know that NDR’s Cycle composite is a combination of the 1-year seasonal cycle, the 4-year Presidential cycle, and the 10-year decennial cycle. NDR throws all the data back to 1900 into the computers and creates a “mashup” of the historical cycles – aka the Cycle Composite.

I’ve been following the various cycle projections for years. It is fascinating how the market will, more often than not, follow the general meanderings of the cycle projection. While it is true that there are times when the market simply ignores the historical cycles and goes off on its own way, I will say that when the market is “in sync” with the cycle projection, the composite’s projection can be good – actually scary good. Perhaps the key is to recognize that, as the saying goes, while history rarely repeats itself exactly, it does oftentimes rhyme.

What Do the Cycles Say?

Check the chart below of the 2019 year-to-date S&P 500* (red dashed line) overlaid on the cycle composite’s projection (blue line) for the year. Here are my takeaways…

First, as the chart shows, stocks went bonkers early in the year as stocks reacted to the Fed’s complete flip-flop and mostly ignored any cyclical downturns until May. In other words, we can conclude that the market was somewhat “out of sync” with the cycle composite (in a good way however- and we liked that!) from early January through the end of April.

Next, the traditional “Sell in May” move began right on schedule this year. And while the move in the market was much more severe than the cycles had called for, the end result was that by the beginning of June, the market was back in line with where the projection said it would be.

Then with yet another hope for a positive resolution to the trade war, the S& P once again scooted away from the cycle’s projection into the end of July with the S&P scoring new all-time highs.  I believe that the move was still largely in line with what the cycle composite had projected.

Next came the “volatile period” from July through August. And once again, the S&P stuck to the script.

And since the beginning of September, the market has continued to follow the lead of the cycle composite’s projection. So much so that as of Monday’s close (Oct 7), the S&P 500 closed almost EXACTLY where the cycle said it would (the green circle on the chart). Eerie, right!

What’s Next?

Naturally, the next thing to do here is to look at what is projected for the remainder of the year. The bad news for the bulls is the cycle composite suggests that the traditional “fall swoon” is likely to continue through the end of the month.

The good news is that from there, after a brief period of back and forth, the typical year-end rally is projected to commence. And although the trend of the cycle composite is more important than the level, the projection is for the S&P to finish near the highs of the year. (Applause!)

While the market will likely continue to be driven by the news, the chart suggests that the market may continue to stick to the script for the final 3 months of 2019.

Fingers crossed!

Thanks to my friend Dave Moening for his input on the Ned Davis composite


Ron’s Market Minute – And the ‘Jinx Month’ Continues

With the arrival of October, we have officially closed the books on the third quarter of 2019 and entered the final stretch of the year. Despite some volatility during the quarter, both the S&P 500 and Dow Jones Industrial Average notched modest gains of just above 1% for the quarter, while the Nasdaq Composite had a slight decline of about 0.1%. Meanwhile, falling interest rates were a boon for fixed income investors and the Bloomberg Barclays US Aggregate Bond Index posted a total return of 2.27%.

Investors have a long-standing love-hate relationship with the month of October, which is sometimes called the “jinx month” – a moniker it owes to the fact that some of the largest one-day market declines, including Black Tuesday (1929) and Black Monday (1987), occurred in October and some of the most notorious market meltdowns have happened, or at least escalated, during the month. On the other hand, October is also known as the “bear killer” as it has “turned the tide in 12 post-WWI bear markets,” according to the 2018 Stock Trader’s Almanac. Despite its shaky reputation, October has historically produced positive returns more often than not, as the S&P 500 has notched gains in 59% of the Octobers from 1950 through 2018 (Source: Nasdaq Dorsey Wright). However, as we saw last year, when the S&P fell nearly 7%, investors’ uneasy relationship with October is not unwarranted. 

I’ve been watching markets –, and been fascinated by them — since the mid 1970’s, and I really can’t remember EVER seeing more ‘headline’ mania than we have right now. This week market fluctuations have been mostly determined by speculation and tweets on what may or may not happen at trade negotiations between China and the USA.  No matter what the actual economic strengths or weaknesses of this nation might be, any fundamental logical potentials can (and probably will) be blown away with tomorrow’s first tweets on the trade negotiations. I find it somewhat disgusting… But also fascinating.

Will this be another Jinx Month- or another ‘Bear Killer’ that ends the weak summer? 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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