Patterns Everywhere
Cycle analysts think their work is no more outrageous than using a calendar to gauge which months will be warm and which will be cold. If we were in a primitive society that didn't understand the seasonality of weather, a forecaster in midwinter who predicted sunny skies in six months might be considered a prodigy. To the cycle crowd, the world of stocks and commodities is underpinned by mathematical patterns invisible to the naked eye.
Many major cycle observers grew bearish in December as their macroeconomic, astrological, Gann and monthly timing models forecast a decline in investor confidence and a rise in energy prices. Some relied on a long-circulated version of a timeline developed by cycle-watchers' favorite dead Russian economist, Nikolai Dmitrijewitsch Kondratieff, that called for an end to a 2002-2004 bull market on Jan. 2, 2005.
If you lump all of their views together, you can assemble a consensus view that the middle of 2005 will witness a market top that will rival the 2000 top in significance and usher in a 1973-1975 style bear market.
More specifically, a popular scenario foresees the equity market rallying this week and maybe next, then spiraling into a selloff that climaxes in March. That would be followed by a rally that crests in June or July a smidge above the December 2004 highs. Stocks would then begin a sickening slide into October. Another rally would materialize there into November, to be followed with another plunge into 2007-2008 that would mark the end of the "secular" bear market that began in 2000.
What Does It Mean to the Rest of Us?
Should we care about this soothsaying? Yes, to an extent. Even if you do not believe in cycle work, it's important to recognize that many others do. If the views are strong enough -- and acted upon with strong buying or selling -- they can become self-fulfilling prophecies. It's the George Soros theory of reflexivity at work.
Many major hedge funds use cycle work to help them plan their year. It tells them what might happen, on the basis of a variety of tested theories. They don't use individual cycles derived from Elliott waves, Gann patterns, seasonality, presidential cycles, 20-year cycles and 40-month cycles in isolation.
Rather, they overlay numerous successful cycles from a variety of sources to see where reversal points line up. Then they study a calendar and try to determine what news events would spark downswings or upswings and, most importantly, those reversals. They tend to trust their cycle work without knowing exactly what will lead to inflection points. They always seem to feel safer, intellectually, if they can find a good story to support the math.
Jon Markman
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