Stocks, Gold, and the 10 Year Kress Cycle Peak
Clif Droke, September 11th, 2009
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Talk is now circulating in financial quarters of a new "mini-bubble" in the making. Apparently the unbounded rise in the stock market is reviving fears of another collapse like the one suffered last year.
Another reason that the "hated rally" has sparked fears is that we're about a year removed from the final "hard down" phase of last year's 6-year cycle collapse. September 2008 witnessed the financial markets crater and the intensity of last year's fear was unmatched in our lifetime. Not even the 1972-74 bear market, which was the worst since the Great Depression, witnessed a comparable level of fear.
W.D. Gann used to emphasize the importance of anniversary dates when it came to financial market analysis. The 1-year anniversary of an important market event is by far the most pivotal such date since the collective memory of the investing public is rather limited. Most market participants can still vividly recall the "great unwinding" of September-November last year. The vividness of that primal fear is still strong, hence the reason for the widespread expectation of another crash.
What most investors don't realize is that the cyclical forces responsible for last year's debacle are the complete opposite of this year's. Instead of a bottoming 6-year cycle, the new 6-year cycle that began last fall is up and supportive of the broad market. Even more poignant is the fact that the 10-year cycle is currently in its final "hard up" ascending phase. More than any other factor, this is the reason behind the strong recovery rally of recent months.
Another factor behind the public's timidity is the economy. Consumer spending took a sizable hit this year in an "echo" effect of last year's financial market turmoil. While there is no denying the financial turmoil of 2008 has no parallel in recent history, a comparison can nonetheless be made between the 1994-95 experience and the 2008-09 episode. In '94 the 10-year cycle was in its final "hard down" phase and stocks were in a mini-bear market. Economic activity was at a low ebb in some sectors of the economy and pessimism was everywhere evident.
In '95 a new 10-year cycle was in force and stock prices rallied non-stop all year. Yet instead of seeing widespread participation, investors mostly stayed on the sidelines and never got a piece of that year's relentless bull market. Investor advisory sentiment was at its most negative in years and by the end of 1995 talk of a stock market crash was pervasive (sound familiar?) What's even more instructive is that the recovery rally of 1995 preceded an economic recovery the following year. Whereas the labor market at that time was soft and apartment vacancies were relatively high in many East Coast metro areas, the year 1996 saw the beginning of a recovery that began in the financial sector and extended into the general economy. Here again we see how the stock market always foresees economic reversals well in advance of the government's statistics.
The public was almost a year behind the curve in the 1995 recovery. Investors finally bought into the recovery in '96 and they'll eventually respond to the recovery of '09, as surely as the pessimism of '09 is a carryover reaction from last year's crisis. As one proof of that observation we offer as evidence a chart from Ned Davis Research as annotated by a colleague. He presciently observes that stock prices typically peak out when the unemployment rate is at low ebb, as was the case in the mid-to-late 1960s and late 1990s. The unemployment rate typically spikes at major market bottoms, as was the case in 1974-75 when the 40-year cycle bottomed and stocks ended a horrendous bear market and also in 1982 just as stocks were coming out of the '81-'82 bear market. A similar spike in unemployment was witnessed between 2008 and 2009 as the previous bear market was concluding.
