What Do The Cycles Say About August?

Although stocks are clearly in an uptrend at the present time, one could not be blamed for feeling like the dog-days of summer are upon us.

Russell 2000 and NASDAQ

With the exception of just a couple solid up days, the stock market has spent the vast majority of the last three weeks going sideways. But with the Russell 2000 finishing Monday at a fresh all-time high, the NASDAQ closing at another new 13-year high, and the S&P only a smidgen away from new high ground, it is hard to argue with the fact that the overall trend remains a friend to the bulls.

However, the bears are quick to remind anyone willing to listen that all good things come to an end, eventually. Another saying that the glass-is-half-empty crowd has been heard bandying about lately is "the market can remain irrational longer than you can remain solvent." And while this might appear to be a warning about not staying on the wrong side of the tape for too long, in the bear camp it is actually a reference to the idea that this market has no business being where it is these days.

Speaking of Wall Street wisdom, most successful investors will agree that markets are never wrong, people are. And back in the 1980s, one of the first lessons learned about this game was that nobody cares what a trader thinks. This is a lesson that traders should remind themselves of on almost a weekly basis.

Yet, it is fascinating that thirty years later, the airways are filled daily with professionals telling us what is going to happen next and that there is still a raging bull market in opinions about the stock market.

Predictive Camp

Rest assured, this is not a launch into yet another diatribe on the benefits of staying in tune with what the market IS doing or using systems to guide your buying and selling decisions. However, yet another caveat will be provided to show that this discussion could easily be placed into the "predictive camp," and that using such an approach in a vacuum can be downright dangerous.

Again, the bottom line is that checking in with the cycles of the stock market can be a useful exercise as the market oftentimes follows either the one-year, the four-year Presidential, the ten-year decennial cycle or a combination all three cycles to a "T."

So, given that it is early in the month and there isn't much happening right now, this is a good a time as any to check back in with the cycle work.

The first point to make about the cycles is that after diverging a bit in June, the market appears to be back on track with the projections of the cycle composite (a combination of the one-, four-, and ten-year cycles). While the cycles called for a fairly big dip in July - which didn't happen - the cycle had also not called for much of a decline in June.

So, these moves appear to have cancelled each other out.

Looking ahead to August, the cycle composite is choppy within in a fairly tight range throughout much of the month. And then, near the end of the month, a modest uptrend resumes into early September. Therefore, both teams may wind up becoming frustrated over the ensuing weeks.

Once again though, there are some discrepancies among the messages provided by the individual cycles that are worth noting. For example, while the one-year cycle projects a steady advance in August, the four-year actually suggest a downtrend that stays intact until November. And as you might suspect, the tie-breaker - the ten-year decennial cycle - suggests that August will be modestly higher.

So, there it is; the market is likely to move up, down or sideways! And if traders feel compelled to insert an eye roll here, they won't be blamed.

However, the takeaway is that since the one-year suggests a strong up move and the ten-year points to a modest trend higher, the odds would seem to favor the bulls. But... should the bears finally find a raison d'etre and if prices start to break down, it might be a good idea to pay attention to the four-year cycle.